Crowding Effect: An evaluation to the use of Expansionary Fiscal Policy Key Assumption: Increase in Gov expenditure needs to be financed

by borrowing from the same source of private lending institution and/or government has no past reserves/savings from previous budget year surpluses. revious

For H2s: Government spending if financed by borrowing competition for loans dd for loans from D1 to D2 upward pressure on i/r increase i/r from R1 to R2 raises the cost of borrowing cost of borrowing > expected yielf of the investment project fewer investment projects are profitable volume of investments falls from Q1 to Q2

Individuals may also be discouraged from borrowing scouraged returns to savings are higher opportunity costs of savings increase consumption expenditure on goods bought on credit falls Fall in I and C might offset G AD falls from AD2 to AD3 limits the effectiveness of expansionary FP Hence total net effect of Increase G = AD1 increase to l AD3 instead of AD2.