ECN_203__17_Fiscal Policy(f09)

ECN_203__17_Fiscal Policy(f09) - Chapter 17 Effects of...

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Chapter 17: Effects of Fiscal Policy Fiscal policy causes a change in the government’s budget position (G-T). An expansionary policy increases G and lowers T. -- Causes larger budget deficits. A contractionary policy reduces G and raises T. -- Balances the Budget.
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Budget Deficits and the Crowding-Out Effect A budget deficit leads the government to borrow funds to finance the deficit. Crowding-out effect -- a situation where the interest rate rises when the government borrows funds. This makes it more expensive for the private sector to borrow, which reduces private investment.
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The Crowding-Out Effect D I : private demand for financial capital D G : government’s demand for financial capital (equals G-T) Total demand for financial capital : D I + D G Result : r increases, total quantity of funds (TQ) increases, but I falls.
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Effect Expansionary fiscal policy is partially offset by the crowding-out effect (reduced investment). To what extent the policy is offset
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This note was uploaded on 05/05/2010 for the course ECN 203 taught by Professor Evensky during the Fall '07 term at Syracuse.

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ECN_203__17_Fiscal Policy(f09) - Chapter 17 Effects of...

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