Question

Determine whether each of the following is an example of a situation in which there is indirect crowding out resulting from an expansionary fiscal policy action.

a. The government provides a subsidy to help keep an existing firm operating, even though a group of investors otherwise would have provided a cash infusion that would have kept the company in business.

b. The government reduces its taxes without decreasing its expenditures. To cover the resulting budget deficit, it borrows more funds from the private sector, thereby pushing up the market interest rate and discouraging private planned investment spending.

c. Government expenditures fund construction of a high-rise office building on a plot of land where a private company otherwise would have constructed an essentially identical building.

Short answer

The situations are determined from a fiscal policy action as Stabilization happens on its own.

Step-by-step solution

Introduction 

The given is the examples of situations on the expansionary Fiscal policy action

The objective is to determine whether the situation results in indirect crowding

Explanation (part a)

a)

The government's decision to provide subsidies to businesses is an example of direct spending offsets because the government will not have to make the entire investment to keep existing businesses afloat.

Step : Explanation (part b)

b)

The government's decision to reduce taxes without cutting spending is an example of direct expenditure offsets because the government will not have to cut spending.

Explanation (part c)

c)

The government's decision to invest in the construction of a high-rise office building on a block of land is an example of indirect crowding out because private expenditures are influenced indirectly by interest rate changes. As a result, automatic stabilizing happens.