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AP Macroeconomics Pol 3 C a Define Crowding Out B Explain Using Graphs As Appropriate How Fiscal Policy May Cause Crowding Out Questions

Trace deficit-financed government spending through loanable funds, real interest rates, private investment, capital formation, and long-run growth.

Syllabus
Effective Fall 2022
Course
AP Macroeconomics

Exam points

  • shift loanable-funds demand right or supply left when a larger budget deficit raises borrowing
  • show government borrowing raising the equilibrium real interest rate
  • explain how the higher real rate reduces private investment and other interest-sensitive spending
  • explain why crowding out makes the short-run GDP increase smaller than the multiplier maximum
  • recognise complete crowding out when lower private spending offsets the full fiscal expansion

AP Macroeconomics Pol 3 C a Define Crowding Out B Explain Using Graphs As Appropriate How Fiscal Policy May Cause Crowding Out Questions 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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