Explain Why Government Budget Deficits Crowd Out Private Investment Spending

question 54

Essay

Explain why government budget deficits crowd out private investment spending in a closed economy, but crowd out net exports in a small open economy. Assume prices are flexible and that factors of production are fully employed in both economies. Assume there is perfect capital mobility for the small open economy.

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Definitions:

Divided Attention

The mental ability to process multiple sources of information simultaneously or switch focus among varying stimuli.

Attention Switching

The process of shifting focus from one task or stimulus to another, which plays a vital role in cognitive flexibility and multitasking abilities.

Automatic Task

A task performed with little or no conscious effort or control, often because it has been practiced to the point of automatization.

Dictation Practice

An educational activity involving the speaking of words or sentences for someone else to write down, aimed at improving writing, typing, or language learning skills.