Crowding Out

With expansionary fiscal policy the income (GDP) ________ and the money demand (MD) will ________. This causes interest rates to ________ which makes it more expensive to take loans. This causes Investment (I) expenditure by firms to ________.

Crowding-out effect on investment - the offset in aggregate demand that results when expansionary fiscal policy raises the interest rate and thereby reduces investment spending.

When the interest rate rises from fiscal expansion (increase in government spending) it causes the domestic assets (bonds) to become ________ attractive so the domestic currency will ________. This causes net exports to ________ (get crowded out).
In an open economy with flexible exchange rates, expansionary fiscal policy causes ________ crowding out since both Investment and Net Exports get crowded out so the expansionary fiscal policy is ________ effective.

When the interest rates rise higher than the world interest rate it causes domestic assets to become ________ attractive which causes ________ foreign currency to flow in to the domestic country.
We exchange the foreign currency for domestic dollars at the central bank.
This causes domestic money supply to ________ and interest rate to ________ back to the original level.
Overall there is ________ crowding out of Investment or Net Exports.
This is why fiscal policy is more effective with a ________ exchange rate.