Crowding Out / Fiscal Multiplier

Question 1

What is the crowding out view

Answer 1

That a rapid growth of government spending may cause a transfer of scarce productive resources from the private sector to the public sector where productivity might be lower

Question 2

Crowding out - what if the government runs a big budget deficit

Answer 2

It will have to sell debt to the private sector and getting individuals and institutions to purchase the debt may require higher interest rates. Rise in interest rates = crowd out private investment and consumption, offsetting the fiscal stimulus

Question 3

Evaluating the crowding out theory

Answer 3

Unlikely to happen

Question 4

What is the fiscal multiplier

Answer 4

It measures the short-term impact of discretionary fiscal policy on the level of RNO

Question 5

What does the fiscal multiplier measure - numerically

Answer 5

The effect of a £1m change in spending or a £1m change in tax revenue on the level of GDP

Question 6

What did the IMF find

Answer 6

-spending multipliers are larger than revenue multipliers
-fiscal multipliers are generally larger in downturns than in expansions
(Supports Keynesian views)

Question 7

What determines the size of the fiscal multiplier

Answer 7

• design
• financial stress (uncertainty might make people save tax cuts)
• temporary or permanent fiscal raise
• availability of credit
• openness of the economy

Question 8

How does the openness of the economy determine the size of the fiscal multiplier

Answer 8

The more open an economy (ie the higher is the ratio of imports and exports to GDP) the greater the extent to which higher government spending or tax cuts will feed into rising demand for imports, lowering the impact on domestic GDP