Chapter 7: Crowding out

How does taxation affect crowding out

Consumers reduce consumption in order to pay for higher taxes, decrease in consumption offsets government spending reducing size of the multiplier, however the offset is only partial because not all the financing for extra taxes comes from reducing consumption

Selling bonds to the public and crowding out

Raising interest rates; to sell bonds you must increase the interest rate to make it more attractive, thus crowding out other kinds of Smoothing consumption; when bonds mature, interest and principal must be paid to the bond holders. People anticipate that future taxes will be higher so they start saving more

The role of income taxes

Taxes inhibit the rise in consumption spending, aggregate demand does not increase by as much at each stage of the multiplier process, so the multiplier process does not stimulate income by as much

What does washington needing cash mean?

The fed. government needs to sell bonds to obtain cash in order to finance its budget deficit

Printing money and crowding out

When buying a bond, the central bank writes a cheque against themselves, so they're basically making money out of thin air. However, printing too much money creates inflation. Printing money mixes fiscal policy of increased government spending with monetary policy of increased money supply. Thus, there are no crowding out effects.

What does crowding out mean

A process where an increase in government spending crowds out, or decreases other components of aggregate demand, thus making the multiplier smaller

What are automatic stabilizers?

Anything that causes the multiplier to become smaller as it insulates the economy from the effects of policy errors or shocks