http://www.flickr.com/photos/72030112@N04/6942507111/ Use the graph in this link

Question

http://www.flickr.com/photos/72030112@N04/6942507111/

Use the graph in this link for reference.

1. Crowding out suggests that an increase in government spending financed by borrowing would move the economy from point:
a. C to point F.
b. C to point A.
c. A to point C.
d. C to point E.

2. The concept of crowding in suggests that a government budget surplus would move the economy from point:
a. A to point C.
b. C to point A.
c. E to point F.
d. B to point A.

3. An increase in government spending financed with external debt would move the economy from point:
a. B to point A.
b. A to point G.
c. C to point E.
d. C to point A.

Explanation / Answer

A) b. from C to A http://www.investopedia.com/terms/c/crowdingouteffect.asp#axzz1npnw1di3 crowding out leads to higher interest rates which the govt can always pay but the private firms cannot. so their output decreases B)c. E to F An economic principle in which private investment increases as debt-financed government spending increases. This is caused by government spending boosting the demand for goods, which in turn increases private demand for new output sources, such as factories. This is in contrast to crowding out C)c.C to E increase in external debt over a certain threshold will have negative effects

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