crowding out effect fiscal policy evaluation

• What is a key argument that classical economists make against active fiscal policy?

  Government borrowing can crowd out the private sector
• What does it mean for the private sector to be "crowded out"?

  Reduced private sector investment due to government borrowing
• What do governments issue to borrow money and facilitate spending?

  Bonds
• What is another name for savings in the context of government borrowing?

  Loanable funds
• When a government spends money by borrowing, what are they demanding?

  More loanable funds
• In the market for loanable funds, what is the price of loanable funds?

  The interest rate
• What type of slope does the supply of loanable funds curve have?

  Upward sloping
• What type of slope does the demand for loanable funds curve have?

  Downward sloping
• What happens to the demand curve for loanable funds when the government demands more savings?

  It shifts to the right
• What is the effect on market interest rates when the demand for loanable funds increases?

  Interest rates increase
• How does an increase in interest rates affect private sector firms needing to borrow money?

  They have to pay more interest
• How can higher interest rates impact private sector investment?

  It can hold back investment
• What can be held back when investment is held back?

  Aggregate demand and growth
• According to classical economists, what is the result of excessive government borrowing?

  A crowding out effect
• What are government bonds called in the UK?

  Gilts or treasuries
• What is the term for the amount the government needs to borrow?

  Public sector net cash requirement