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What Is "Crowding Out"? Why Is It Important in Discussions

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Essay

What is "crowding out"? Why is it important in discussions of fiscal policy? Use an appropriate diagram to illustrate your answer.


Definitions:

Long-Run Aggregate Supply

The total amount of goods and services produced in an economy at full employment, unaffected by price levels in the long term.

Nominal Wage

The wage that is paid to workers in current dollars, without adjustment for inflation.

Capital Stock

The total amount of physical, human, and intellectual capital that a country possesses at any given time.

Beneficial Supply Shock

An unexpected event that increases the production capacity and decreases the prices of goods and services.

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