AP Macroeconomics AMSCO Guided Notes
5.5: Crowding Out
AP Macroeconomics Guided Notes
AMSCO 5.5 - Crowding Out
Essential Questions
- What is crowding out, and how does fiscal policy affect it?
I. What Is Crowding Out?
1. What is crowding out and what fiscal policies can cause it to occur?
2. Why did the concept of crowding out gain popularity during the 1970s and 1980s?
A. How Does Crowding Out Work?
1. How does a budget deficit force the government to borrow and what methods does it use?
2. How do higher interest rates on Treasury securities affect private investment and spending?
3. How does government borrowing reduce the quantity of loanable funds available for private investment?
4. What is the relationship between budget deficit size and the real interest rate in the loanable funds market?
II. The Effects of Crowding Out
1. How does crowding out limit the effectiveness of expansionary fiscal policy in stimulating GDP?
A. When Crowding Out Does Not Occur
1. What is crowding in and how does it differ from crowding out?
2. What types of government investments can stimulate additional private investment and economic growth?
3. How have government investments in defense and space programs contributed to consumer products and innovation?
B. Long-Run Effects
1. How does crowding out reduce private investment and what are the long-run consequences for economic growth?
2. How can crowding out create a vicious cycle of government borrowing and reduced economic growth?
Key Terms
crowding out