Question

Why is crowding out an important issue in the debate over the merits of discretionary fiscal policy? Is crowding out equally likely to occur during all phases of the business cycle?

Keynesian economists emphasize the effects of fiscal policy on aggregate demand whereas supply-side economists focus on the effects on aggregate supply. Discuss the process by which a tax reduction might result in an increase in real output and employment according to these two approaches. If tax reductions are beneficial for the economy, why doesn't the government slash taxes to zero.

Assume that the economy's marginal propensity to consume is 0.8. To combat a recession, suppose that the federal government increases its expenditures by $50 billion. If prices remain constant, what impact will this policy have on the economy's aggregate demand and real output? Instead, suppose that prices increase as the economy's aggregate demand increases. What effect would this have on your answer?

Answer 1