Crowding Out

What is Crowding Out ?

• A critique and flaw of Keynesian policies that are applied to fight a recession
• expansionary policy

Why does it happen ?

• The policy of cutting taxes and raising spending will create a budget deficit

So ?

• The budget deficit must be funded and to do this Congress orders the sale of U.S. bonds
• NOT a Monetary Policy tool used by the Fed

This money comes from ?

• Mostly from U.S. citizens, companies, and investment firms

Therefore ?

• Money that could be spent on consumption or used for private savings is now being used to buy bonds

On the Money Market ?

• This will cause the money demand curve to shift outward
• this is a Fiscal event

On the Loanable Funds Market ?

• This will cause the supply curve to shift inward because we are not saving money privately anymore
• It can also cause the demand curve to shift outward because the private and public demand for money increases

On both graphs ?

• The nominal and real interest rates will increase

Therefore on the Investment D graph

• The increase in nominal and real interest rates will cause Ig to decrease

Is this counterproductive ?

• Yes

Then why do it ?

• Fiscal Policy supporters ( Keynesians )insist that gains in Consumption and Government Spending will outweigh any losses in future Gross Private Investment

Why ?

• Consumption and Government Spending are greater than Gross Private Investment and they are short run improvements
• Gross Private Investment is long run and Keynesians don't worry about that
• In the long run, we are all dead

Anymore ?

• This is summarized on the Aggregate Model
• AD will move outward due to the increase in Consumption and Government Spending and then "maybe" move inward due to a loss of Gross Private Investments , but not as much as the increase
• Economy Improves