AP Macro Unit 5 Review- Topic 5.5: Crowding Out
why does private investment decrease when gov. increases deficit spending?
private sector spending is interest sensitive, and increase in deficit spending---> increase in real interest rate, so private investment goes down
what happens to public investment if gov. increases deficit spending?
public investment goes up
crowding out
when gov. borrowing/deficit spending leads to a decrease on interest-sensitive private sector spending
long-run impacts of higher real interest rates?
less economic growth because investment falls. less capital stock.
what happens to real interest rate, private investment, and demand for loans when the gov. increases deficit spending?
demand for loanable funds increases (D shifts right), real interest rate increases, private investment decreases (quantity of private loans goes down)
