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4. When the government budget deficit rises, many economists predict that private investment will be
"crowded out." Use a capital market diagram to demonstrate the crowding out phenomenon after an
increase in the government budget deficit. Make sure that you clearly label the magnitude of investment
crowding out. Dr. Gropp Name__ __ ________________ Answers:
1. Since 1900, three major factors have altered productive capacity (potential output) in the U.S. economy. First, the capi tal stock has increased, as a result of
investment. With more capital resources, aggregate production capacity rises. Second, the population of the U.S. has grown dramatically, and the proportion of the
population participating in the labor force has gone up due to demographic and preference shifts, such as more women entering the labor force. These changes
have created more labor resources. You might also have mentioned that improved education has greatly increased the skill of the work force (higher "human
capital") which probably create...
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