Explain why government budget deficits crowd out private investment spending in a closed economy, but crowd out net exports in a small open economy.

Explain why government budget deficits crowd out private investment spending in a closed economy, but crowd out net exports in a small open economy. Assume prices are flexible and that factors of production are fully employed in both economies. Assume there is perfect capital mobility for the small open economy

Expert Solution

In the closed economy, the increase in the budget deficit reduces national saving and increases the interestrate, which crowds out (decreases) private investment spending. In the small open economy, the budgetdeficit reduces national saving, which increases the real exchange rate. The increase in the real exchangerate crowds out (decreases) net exports.

Rahul Sunny answered 2 years ago

Explain why government budget deficits crowd out private investment spending in a closed economy but crowd...

Explain why government budget deficits crowd out private investment spending in a closed economy but crowd out net exports in a small open economy. Assume that prices are flexible and that factors of production are fully employed in both economies. Assume that there is perfect capital mobility for the small open economy.

Explain why government budget deficits crowd out private investment spending in a closed economy, but crowd...

Explain why government budget deficits crowd out private investment spending in a closed economy, but crowd out net exports in a small open economy. Assume prices are flexible and that factors of production are fully employed in both economies. Use the basic version of the open-economy model that abstracts from foreign debt accumulation.

Explain crowding out of investment via increased government spending using both the AD-AS framework and closed-economy...

Explain crowding out of investment via increased government spending using both the AD-AS framework and closed-economy loanable funds simultaneously, drawing both the short-run and long-run equilibria.?

3. Does government intervention crowd out private education? Does government spending improve education outcomes? Explain. 4....

3. Does government intervention crowd out private education? Does government spending improve education outcomes? Explain. 4. Describe if there is a relationship between public spending and the quality of education and whether education increases earnings?

how might federal deficits crowd out private domestic investment? How could this crowding out affect future...

how might federal deficits crowd out private domestic investment? How could this crowding out affect future living standards?

How could a persistent government deficit ‘crowd out’ investments and net exports? Describe and illustrate using...

How could a persistent government deficit ‘crowd out’ investments and net exports? Describe and illustrate using diagrams for national investment and national savings as well as the diagram for the macroeconomic model (aggregate demand and aggregate supply)

Explain specifically how negative net exports affect aggregate expenditures in the private, open economy and equilibrium...

Explain specifically how negative net exports affect aggregate expenditures in the private, open economy and equilibrium GDP. Explain specifically how positive net exports affect aggregate expenditures in the private, open economy and equilibrium GDP. Be sure to explain how the graph of aggregate expenditures is impacted by each situation along with the size of the change in equilibrium GDP relative to the size of the change in aggregate expenditures.

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Explain why government budget deficits crowd out private investment spending in a closed economy, but crowd out net exports in a small open economy.

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