Please explan in detail. and also reasons that cause crowding out effect and dif
ID: 2440957 • Letter: P
Question
Please explan in detail. and also reasons that cause crowding out effect and different between monetary expansion and fiscal expansion
18. The term "crowding-ou effect refers to (a) the reduction in aggregate supply that results when a monetary expansion causes the interest rate to decrease. (b) the reduction in aggregate demand that results when a monetary expansion causes the interest rate to decrease. hen a fiscal expansion causes the interest rate to increase. the reduction in aggregate demand that results when a decrease in government spending or an increase in taxes causes the interest rate to increase. (d)Explanation / Answer
The answer is "C".
Monetary expansion refers to the situation where the Fed increase the money supply to increase the demand in the economy. Fiscal expansion is when the government spend more in form of government purchases to increase the demand in the economy. The major difference is that monetary policy decreases the interest rate and fiscal policy cause the interest rate to rise and that increased rate decrease the private investment. That decreasing private investment is called crowding out.
when the government increases the expenditure the income of people rises. With a higher income, people will save more in proportion to their income. This increased saving will increase the inflow of loanable fund and to manage that the interest rate will rise. causing crowding out.