Explain What Extrusion Effect Is For Entrepreneurs?

　　 Squeeze Crowding (Out Effect) refers to a relative. plane In the market, due to the new supply and demand increase, some of the funds have been squeezed out of the original advance and inflow into new commodities.

Crowding out effect: private consumption or investment caused by increased government spending. reduce Effect

First, the government raises funds for its expenditure by selling government bonds in the open market. In this case, as the money supply remains unchanged, the government sells bonds equivalent to some of the funds recovered in circulation, and the market is less capital and interest rates rise. The rise of interest rate reduces private investment, which results in crowding out effect. The size of the crowding out effect depends on the interest rate elasticity of investment, while the interest rate elasticity of investment is large and the crowding out effect is large.

Two, the government raises taxes by raising taxes. In this case, tax increases have reduced private incomes and reduced private consumption and investment, resulting in crowding out effects. However, the size of the crowding out effect depends on the marginal propensity to consume, while the marginal consumption tends to be large.

Three, in the case of full employment, the increase in government expenditure has led to an increase in the price level. The rise in this price level will also reduce private consumption and investment, resulting in crowding out effects.

Four, the increase in government spending has an adverse effect on private expectations, that is, private pessimism for future investment returns, thereby reducing investment.

Five, in the open economy, when the fixed exchange rate system is implemented, the increase in government expenditure raises the price rise and weakens the competitiveness of commodities in the world market, thereby reducing exports and reducing private investment.

If the government increases a certain amount of public expenditure, it will reduce the corresponding amount of private investment, so the aggregate demand will remain unchanged. Western economists have two different opinions on the crowding out effect.

Economists who oppose state intervention argue that the crowding out effect is undeniable. Since public expenditure is private or private, if the money supply remains unchanged or increases, the increase in public expenditure will cause pressure on demand for money, forcing interest rates to rise, thereby reducing private investment. Therefore, crowding out effect will not change aggregate demand.

Keynes advocates advocating state intervention:

(1) the crowding out effect of public expenditure must be analyzed according to specific circumstances. Generally speaking, there will be crowding out effects only after full employment is achieved. Under the condition of insufficient effective demand, there is no problem of public expenditure squeezing private investment during the depression.

(2) in addition to interest rate level, there is also the expected profit margin factor affecting private investment. If the increase of public expenditure can increase the expected profit rate, then public expenditure on private investment is not "squeezed out" but "crowded in".

In addition, even if public expenditure affects the level of profitability, but because the sensitivity of private investors to the change of expected profit rate is more sensitive than that of interest rate changes, public expenditure can not "squeeze" the equivalent private investment. Therefore, increasing public expenditure can still increase aggregate demand.