Suppose a government fiscal policy creates a $25 billion budget deficit.
a. What does it mean when a government is facing a budget deficit?
b. What are the two ways a government is likely to deal with a deficit?
c. If the government chooses to borrow the $25 billion through the selling of bonds, model the change
d. That takes place in the market for loanable funds.
e. On your model label the quantity of loanable funds in which private investment may be crowded out.
f. Explain the concept of crowding out. What is the significance of crowding out on fiscal policy?