What is the crowding out effect on private investment? increase? decrease?
lower investment due to high interest rate to borrow
decrease in investment, increase in savings
CAN SOMEONE please tell me what is the difference between crowding out effect and govt deficit/surplus
Fed can influence crowding out effect by changing interest rates or money available. Govt can spend or not spend more adjusting the deficit.
Crowding out is when the government spends more than it receives in taxes from its citizens. Where is it taking the money from? borrowing. What is this doing to the interest rates? driving them up, hence the higher the interest rates, the lower the willingness of investor to take on debt and invest, because they would be forced to find projects that must have a higher return, the Government is “crowding” inventors out. Government doesn’t really care; it can print more money anyway. The deficit is the extra spending that the government is doing. What is this doing to the trade balance? Well, since the interest rates go up, foreigners would seek investments in the country with a deficit, because they would get a higher return. This, in turn, increases the power of the currency, which in turn makes the goods produced (in the country with deficit), more expensive to the rest of the world, and the goods produced in the rest of the world cheaper for the citizens of the country at deficit. That implies higher imports, lower exports, a trade deficit.
wow…map1…you talk like a economist…I am looking for the concept in the text book, now I just printed out your words and try to remember it. thank you.
thank you map1
better check with the textbook
map1 Wrote: ------------------------------------------------------- > Crowding out is when the government spends more > than it receives in taxes from its citizens. Where > is it taking the money from? borrowing. What is > this doing to the interest rates? driving them up, > hence the higher the interest rates, the lower the > willingness of investor to take on debt and > invest, because they would be forced to find > projects that must have a higher return, the > Government is “crowding” inventors out. Government > doesn’t really care; it can print more money > anyway. > > The deficit is the extra spending that the > government is doing. What is this doing to the > trade balance? Well, since the interest rates go > up, foreigners would seek investments in the > country with a deficit, because they would get a > higher return. This, in turn, increases the power > of the currency, which in turn makes the goods > produced (in the country with deficit), more > expensive to the rest of the world, and the goods > produced in the rest of the world cheaper for the > citizens of the country at deficit. That implies > higher imports, lower exports, a trade deficit. Thank you so much map1! this concept is now clear as crystal!
hmmmm, very well explained map!
a deficit ENGENDERS a crowding out. just remember DC deficit = crowding out.
awesome map 1. this helps me to understand it too