178,050,287 Videos Watched

Age Filter: Click to Set

Embed Video
Embed Video:
URL of source video:
Simply give the URL and we will get the embed code automatically, if we support embedding from the site.

Fiscal Policy and Crowding Out

Please wait...

Some content viewed on WatchKnowLearn is hosted by other websites.


Not Right For WatchKnowLearn

Remember to Rate

Not Right For WatchKnowLearn
WatchKnowLearn ratings are intentionally harsher than what you might find on YouTube, for example. Most of our videos have been imported by people who want to use them with kids, not by the creators of the videos. We take a hard-nosed attitude toward quality. Four and five stars should be reserved for really excellent quality. Three stars isn't bad. Two is often watchable and shouldn't be ruled out.

  • 5 stars = Exemplary.
    Unusually helpful and well produced. Do not overuse this, please; it is not the standard rating for decent work, as it is elsewhere.
  • 4 stars = Very Good.
    Very helpful but not among the very best; adequately produced, at least.
  • 3 stars = Usable.
    Reasonably helpful, perhaps a bit amateurish in production or has some other problem; there is nothing wrong with a 3-star rating for amateur work!
  • 2 stars = Some Merit.
    Minimally helpful; not completely worthless or inappropriate; you can see how it might be useful to some people.
  • 1 star = Not Right for WatchKnowLearn.
    Not at all helpful, not educational, poorest quality, etc.; you can't see it being useful to anyone.

More help with rating

Add To Favorites
Add To Classroom
Add video to Featured
Flag This Video


From YouTube (Approved: teresahopson), produced by Marginal Revolution University
(05:25) Effective fiscal policy has to be timely, targeted, and temporary. But how the central bank, businesses, and consumers respond to fiscal policy also plays a role in how effective it is.

When expansionary fiscal policy is enacted, what happens to the aggregate demand curve? It shifts out with the goal of increasing real GDP growth in the short run. But inflation also increases. Can you think of how a central bank might respond to higher inflation? Yep, they might contract the money supply through monetary policy.

So one way that fiscal policy can be offset is by the actions of a central bank. Now let’s think about how businesses and consumers might respond to expansionary fiscal policy.

If the government has increased its spending through borrowing, interest rates in the loanable funds market tend to be higher for consumers. If you’re a business owner, you might think twice about investments that would require a loan. Decreased investment has a negative effect on overall real GDP growth, partially offsetting fiscal policy.

What if the government uses tax cuts in its stimulus plan? You may decide to not spend that extra money, thinking that a tax cut today might be matched by a tax increase in the future. That’s good planning! If enough people think this way and save their tax cuts, this will completely crowd out the fiscal multiplier.

In reality, this particular scenario is unlikely. Think about it – do you incorporate your future (and unknown) tax burden into your financial decisions today? Probably not. Most people tend to not be quite that future-oriented. But it’s not safe to assume that everyone will just spend all of their tax cuts either.

As you can see, there are quite a few unknowns when it comes to how a stimulus will be received. A thorough understanding of the models is crucial for successful fiscal policy, as is context for the economic situation in which they will be implemented.
Ages: 14 - 18 License: Educational Community License Owner: Marginal Revolution University Found by MRUniversity
  • Unless changed, the Finder is the person who uploaded the video to WatchKnowLearn.
  • The Finder is allowed to "lock" information about the Owner and Producer (so other accounts cannot edit this information). The Finder field should match the Owner field when a video is entered in a contest.
  • As owner of a video, you can have finder rights transferred to you.
Simply click "Request Finder Rights" and an e-mail will be sent to the current Finder of the video. The Finder may then transfer rights to you. If he or she does not, bear in mind that an Administrator will see the refusal of your request and will be able to review it.

More help about the Finder field

History [show]

Loading history...

Please make your comments on videos positive, and not just negative.

People work hard on educational videos, and we want to encourage them to make more!

  • Profanity (curse words), sexually suggestive remarks, and other such obviously inappropriate comments will be deleted immediately, and are grounds for immediate expulsion. Remember, children use this website.
  • Personal criticism on project forums and in video content is not allowed and will be deleted immediately. Any violations of this rule could result in expulsion from the project so please, no insults or other negative personal remarks.
  • Very harshly-worded criticism of content will also be deleted promptly. Please use your vote to express your harshest feelings. Repeated violations of this rule can result in expulsion. If you must criticize another person's hard work, then be nice about it.
If you want to comment, please sign in