HOW THE MAGNITUDE OF THE MULTIPLIER IS REDUCED BY THE CROWDING OUT EFFECT
THE MULTIPLIER ANALYSIS PRESENTED THUS FAR OVERSTATES THE MAGNITUDE OF THE MULTIPLIER.
THUS, THE MULTIPLIER ANALYSIS PRESENTED THUS FAR OVERSTATES THE POWER OF FISCAL POLICY.
TWO FACTORS WHICH REDUCE THE SIZE OF THE MULTIPLIER:
1. THE CROWDING OUT EFFECT
THE CROWDING OUT EFFECT
The tendency for increases in government spending to cause offsetting reductions in spending in the private
THE CROWDING OUT EFFECT AS A RESULT OF
DISPLACED PRIVATE SPENDING
Suppose the government provides funding for a new sports arena. It would appear that this increase in autonomous
government spending would lead to a large multiplier effect and a large increase in total output.
Suppose that, in the absence of the government funding, the same arena would have been built using funds provided by
the private sector.
In this situation, there is no net gain as a result of the increase in autonomous sp