Assume that if there were no crowding out, an increase in government spending would increase GDP...
Assume that if there were no crowding out, an increase in government spending would increase GDP by $100 billion. On the other hand, if there had been full crowding out, then GDP would have
Group of answer choices
not increased.
increased by $100 billion.
increased by more than $100 billion.
increased by less than $100 billion.
Homework Answers
Answer: increased by less than $100 billion.
When there is the crowding out, most of the money is spent on paying the interest, and finally, less investment can be made on the production. This reduces the improvement in the GDP. Thus, GDP growth will be less than $100.
For example, government is investing $10 billion and without crowding out, entire amount is invested. So, $100 billion GDP increase can be achieved,
In case of crowding out, $0.5 billion is paid on interest and only $9.5 billion can be invested and the GDP increase would be $95 which is lesser than $100 billion.
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