Economists disagree about the effectiveness of government spending to increase Y. Explain 2 different reasons for this disagreement.
1) Multiplier effect is really small2) Aggregate supply curve is vertical
There are several reasons why economists disagree about the effectiveness of government spending to increase Y (output). Here are two different explanations for this disagreement:
1. Fiscal Multiplier Effect:
One reason why economists disagree about government spending to increase output is based on the fiscal multiplier effect. The fiscal multiplier measures the impact of an autonomous change in fiscal policy on the overall level of output. The multiplier effect is the degree to which a change in government spending or taxation results in a change in national income and spending. If the multiplier effect is high, then a change in government spending will lead to a significant increase in output. However, if the multiplier effect is low, government spending will have little impact on output.
Some economists argue that government spending has a significant multiplier effect and therefore can effectively boost output. Others disagree and argue that the multiplier effect is relatively low and that government spending tends to crowd out private investment, leading to minimal overall impact. Those who are skeptical of government spending also argue that it can lead to inflation, which could offset any gains from increased output.
2. Crowding out effect:
Another reason why economists disagree about government spending’s effectiveness to increase output is based on a concept called the “crowding out effect.” The crowding-out effect occurs when an increase in government spending leads to a decrease in private investment, which offsets the positive effects of the government’s spending.
Some economists argue that government spending generally crowds out private investment, leading to a minimal impact on output. They argue that the government’s spending diverts resources from the private sector, making it harder for businesses to invest in their own growth. Others, however, argue that crowding out is not a significant issue and that government spending can complement private investment, leading to a more significant increase in output.
Overall, the disagreement among economists on the effectiveness of government spending to increase output largely boils down to differing views on the fiscal multiplier effect and the crowding-out effect.
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