Explain Why Government Budget Deficits Crowd Out Private Investment Spending

question 80

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.Use the basic version of the open-economy model that abstracts from foreign debt accumulation.

---

Definitions:

Commotion

Disturbance or turmoil caused by a large amount of noise and confusion.

Social Exchange Theory

A sociological and psychological theory that studies the social behavior in the interaction of two parties that implement a cost-benefit analysis to determine risks and benefits.

Equity

The concept of fairness or justice in the way people are treated, often related to social, economic, and legal contexts.

Romantic Love

A deep emotional, sexual, and romantic attraction that is associated with a range of physiological and psychological responses.