For each of the following scenarios, indicate if it would necessarily lead to crowding out or not, and explain your reasoning. Assume a closed economy. Assume that fiscal receipts equal outlays when the Federal Reserve increases the discount rate.

No crowding out effect

Explanation:

Crowding out effects only occur when the government's budget is in deficit and they have to borrow to make up for the deficit. If the budget is not in deficit as shown above, the government would not need to borrow money.

Whilst an increase in the discount rate would increase the cost of borrowing, it would not crowd out investment because some firms would still be able to borrow at the higher rates.

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explanation:

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