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Chapter 13: Types of fiscal policy (page 264)

What happens between the public and private sectors during a "crowding out" effect?

Short Answer

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The public sector displaces the private sector

Step by step solution

01

Types of fiscal policy

t is not possible to utilize real resources in both the public and private sectors at the same time. However, if the governments increasingly employ more factors of production into the public sector, the output produced in the private sector must fall. The government incurs an opportunity cost when utilising resources in the public sector when they could have used them in the private sector

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Most popular questions from this chapter

What are the government’s fiscal policy options for ending severe demand-pull inflation?

What is the role of the Council of Economic Advisers (CEA) as it relates to fiscal policy? Use an Internet search to find the names and university affiliations of the present members of the CEA.

Refer to the following table for Waxwania:

What is the marginal tax rate in Waxwania? The average tax rate? Which of the following describes the tax system: proportional, progressive, or regressive?

Last year, while a hypothetical economy was in a recession, government spending was \(595 billion, and government revenue was \)505 billion. Economists estimate that if the economy had been at its full employment level of GDP last year, government spending would have been \(555 billion and government revenue would have been \)550 billion. Which of the following statements about this government’s fiscal situation are true?

  1. The government has a non–cyclically adjusted budget deficit of \(595 billion.

  2. The government has a non–cyclically adjusted budget deficit of \)90 billion.

  3. The government has a non–cyclically adjusted budget surplus of \(90 billion.

  4. The government has a cyclically adjusted budget deficit of \)555 billion.

  5. The government has a cyclically adjusted budget deficit of \(5 billion.

  6. The government has a cyclically adjusted budget surplus of \)5 billion.

Some politicians have suggested that the United States enact a constitutional amendment requiring that the federal government balance its budget annually. Explain why such an amendment, if strictly enforced, would force the government to enact a contractionary fiscal policy whenever the economy experiences a severe recession.
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