Dollar for Dollar Crowding Out in the Textbook Keynesian Cross Model When the Economy is Below Full Employment
19 Pages Posted: 27 Jan 2010
Date Written: January 15, 2010
In this paper, it will be demonstrated that a "dollar for dollar" crowding out of national investment caused by increased government spending is not just something that occurs within classical macroeconomic models. The reason for this is that in a closed economy Keynesian cross model with ignores money, national savings, or Y - C - G, is equal to national investment, or I. Such an "equilibrium" does not provide the national savings needed to finance a purely fiscal increase in government spending in a closed economy. Any additional government spending would have to occur at the expense of an already low level of capital spending and thus make the government spending multiplier equal to zero.
JEL Classification: H5, H6
Suggested Citation: Suggested Citation