Xuan Lam, Nguyen

The logic of crowding-out effect

Case 1: An increase in government spending

G ↑ → B = T - G = SG ↓ → SG + SP = S ↓ → Supply of loanable funds ↓ → r (price of

K Y
loanable funds) ↑ → I ↓ (crowding-out effect) → K ↓ → ↓→ ↓→Y↓→
L L

GDPR ↓ → g ↓

Case 2: A tax cut

T ↓ → B = T - G = SG ↓ → SG decreases $1 as T decreases $1 (1)

T ↓ → (Y - T) ↑ → C ↑ → Due to household saving, C increases less than $1 as T

decreases $1 → Y - T - C = SP increases less than $1 (2)

(1) and (2) → SG + SP = S ↓ → Supply of loanable funds ↓ → r ↑ → . . .

I propose a shortcut alternative as follows:

T ↓ → (Y - T) ↑ → C ↑ (3)

SG + SP = (T - G) + (Y - T - C) = Y - G - C = S (4)

(3) and (4) → S ↓ → Supply of loanable funds ↓ → r ↑ → . . .