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AP Macroeconomics 5.5 Crowding Out Questions

Use fiscal borrowing and the loanable-funds model to explain crowding out of private spending and its consequences for output and growth.

Syllabus
Effective Fall 2022
Course
AP Macroeconomics

Exam points

  • model deficit-financed government spending as greater borrowing in loanable funds
  • trace increased government borrowing into a higher equilibrium real interest rate
  • connect the higher real rate to reduced private investment and interest-sensitive spending
  • explain partial or complete crowding out of the fiscal-policy increase in aggregate demand
  • relate crowding-out size to the interest responsiveness of private investment

Covered syllabus points

POL-3.C—a. Define crowding out. b. Explain (using graphs as appropriate) how fiscal policy may cause crowding out

Question 1

[Maximum number: 3]

Assume the economy of Vanderlandia is in short-run equilibrium with a real GDP of $500 million. The full-employment level of real GDP is $550 million.

Question (a)

(a)

Draw a correctly labeled graph of the loanable funds market, and show the effect of the change in government spending in part (c)(i) on the equilibrium real interest rate.

[ 2 ]

Question (b)

(b)

Based on the change in the real interest rate shown on your graph in part (d), what will happen to each of the following?

[ 1 ]

Question (i)

(i)

The rate of economic growth in the long run. Explain.

Begin your response to this question at the top of a new page in the separate Free Response booklet and fill in the appropriate circle at the top of each page to indicate the question number.

[ 1 ]
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