Question

Assume that if there were no crowding out, an increase in government spending would increase gdp by $100 billion. if there had been partial crowding out, however, then gdp would have?

Answer 1

   if there were no crowding out, an increase in government spending would increase GDP by $100 billion. if there had been partial crowding out, however, then GDP would have increased by less than $100 billion.

When there is crowding out, most of the money is spent on paying the interest, and finally, less investment can be made in the production. This reduces the improvement in the GDP. Thus, GDP growth will be less than $100.

For example, the government is investing $10 billion and without crowding out, the entire amount is invested. So, a $100 billion GDP increase can be achieved,

In case of crowding out, $0.5 billion is paid on interest and only $9.5 billion can be invested and the GDP increase would be $95 which is lesser than $100 billion.

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