Work through the list without notes. If you cannot do a statement, follow its link, then come back. Guide = study guide; Practice = practice questions.
Understanding
- I can define crowding out in one sentence, naming the real interest rate and interest-sensitive private spending. (Guide: “Why a deficit means borrowing”; Practice Q1)
- I can explain why a government with a budget deficit usually has to borrow. (Guide: “Why a deficit means borrowing”)
- I can give examples of interest-sensitive spending and say why everyday spending is less affected. (Guide: “How government borrowing crowds out private investment”; Practice Q3)
Skills
- I can draw a correctly labelled loanable funds graph and show extra government borrowing as a rightward shift of demand, with the real interest rate rising. (Guide: Figure 1; Practice Q6(a))
- I can show the same change as a leftward shift of supply, and I know never to shift both curves. (Guide: “Another way to draw it”)
- I can calculate the new equilibrium, the private investment crowded out and the extra saving from simple loanable funds equations. (Guide: Worked example 1; Practice Q2, Q5)
- I can check that government borrowing equals extra saving plus investment crowded out. (Guide: Worked example 1; Practice Q5(c))
Reasoning
- I can explain why crowding out makes the AD shift from deficit-financed spending smaller than the multiplier alone predicts. (Guide: Worked example 2(a); Practice Q6(c))
- I can explain how crowding out can lower capital accumulation and slow long-run growth, using LRAS. (Guide: Worked example 2(b)–(c), Figure 2; Practice Q4, Q6(d))
- I can explain why crowding out is larger when saving responds less to the real interest rate. (Guide: “What makes crowding out bigger or smaller”; Practice Q7)
All ticked? Move on to Topic 5.6, Economic Growth, or return to the course roadmap.