<p>A vertical LM curve means that any change in government expenditure will result in a change of the interest rate which exactly offsets the initial change of public demand (private demand increases/decreases).</p>

<p>A vertical AS curve indicates the level of long-run output. If AD shifts, all that this will create is a change in prices in the long-run. This is also called the Classical Dichotomy: real variables are independent of monetary variables. </p>

<p>So, both diagrams tell the same story about crowding out: changes of private expenditure offset changes of public expenditure. The diagrams just highlight different parts of the same mechanism.</p>

CC BY-SA 4.0
2019-11-20T10:38:00.620Z
2019-11-20T10:38:00.620Z
daniel_JKU
<p>Repeating from <a href="https://economics.stackexchange.com/a/39734/23124">another answer</a>:</p>
<p>Can a <a href="http://citizensmedia.tv/mmt-developing-nations" rel="nofollow noreferrer">fully-financially-sovereign </a>central government use its monopoly power of currency insurance to purchase up a massive amount of real resources, therefore making it such that there are fewer available for the private (non-government) sector to purchase? Yes. That is possible. If you call that crowding out, then crowding out is possible.</p>
<p>If, however you’re talking about <em>any and all</em> government spending “crowding out“ private sector lending based on the assumption of “loanable funds,” then, no, this kind of crowding out does not exist. The idea of loanable funds assumes that there is only a finite pile of money available to both the government <em>and</em> private sector, from which they can “borrow.”</p>
<p>As long as the real resources are available for purchase, <a href="http://citizensmedia.tv/mmt-crowding-out" rel="nofollow noreferrer">federal government spending crowds <em><strong>in</strong></em> (augments) private spending</a>. This idea of crowding out is false and predicated on three other false ideas. Briefly, it incorrectly assumes that:</p>
<ol>
<li>the central government is a user of <em>its own</em> currency,</li>
<li>banks are revenue/reserve constrained (loanable funds), and</li>
<li>the interest rate is an axiomatic function of the free market.</li>
</ol>
<p>The truth is that:</p>
<ol>
<li>the central government issues currency every time it spends (<a href="http://neweconomicperspectives.org/2010/11/yes-deficit-spending-adds-to-private.html" rel="nofollow noreferrer">even when it sells bonds</a>, which is <a href="http://citizensmedia.tv/mmt-securitization" rel="nofollow noreferrer">very misleadingly</a> called “borrowing”),</li>
<li>banks issue credit every time they lend, and</li>
<li>the interest rate is a <a href="https://www.dropbox.com/s/759h1yrxyxs2j56/Fullwiler-Interest%20Rate%20on%20the%20National%20Debt%20Is%20a%20Policy%20Variable.pdf?dl=0" rel="nofollow noreferrer">policy variable</a> of the Fed’s FOMC board. (They change it because they want to change it.) Further, since the central bank has the infinite capacity to purchase and sell bonds on the open market, they therefore have infinite control over the market interest rate.</li>
</ol>
<p>In summary: Real crowding out is possible, financial crowding out is not.</p>

CC BY-SA 4.0
2020-09-16T13:16:57.327Z
2020-09-29T22:43:23.447Z
2020-09-29T22:43:23.447Z
aliteralmind
<p>In macroeconomics I came across two type of crowding out. First, in IS LM model where in classical case, when LM curve is vertical increase in government expenditures have no increase in output i.e. full crowding out.
Secondly, in AS AD model due to increase in government expenditures when AD curve shift in classical case i.e. Vertical AS curve there is no effect on output. What's the difference between these two cases of full crowding out.</p>

CC BY-SA 4.0
2019-11-19T20:11:27.100Z
Is the second a case of crowding out, or is it a case of an economy at its LRAS - in what case aggregate demand can only impact prices, not output?
heh
<macroeconomics><fiscal-policy>
Difference type of crowding out effect in economics
akshit arora
# Difference type of crowding out effect in economics

(Asked by: username_0 on 2019-11-19)

In macroeconomics I came across two type of crowding out. First, in IS LM model where in classical case, when LM curve is vertical increase in government expenditures have no increase in output i.e. full crowding out.
Secondly, in AS AD model due to increase in government expenditures when AD curve shift in classical case i.e. Vertical AS curve there is no effect on output. What's the difference between these two cases of full crowding out.

**Tags:** macroeconomics, fiscal-policy

> **Comments:**
> **username_1**: Is the second a case of crowding out, or is it a case of an economy at its LRAS - in what case aggregate demand can only impact prices, not output?  

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## 2 answers

### Answer by username_2 on 2019-11-20. Score: 3

A vertical LM curve means that any change in government expenditure will result in a change of the interest rate which exactly offsets the initial change of public demand (private demand increases/decreases).

A vertical AS curve indicates the level of long-run output. If AD shifts, all that this will create is a change in prices in the long-run. This is also called the Classical Dichotomy: real variables are independent of monetary variables.

So, both diagrams tell the same story about crowding out: changes of private expenditure offset changes of public expenditure. The diagrams just highlight different parts of the same mechanism.


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### Answer by username_3 on 2020-09-16. Score: -1

Repeating from [another answer](https://economics.stackexchange.com/a/39734/23124):

Can a [fully-financially-sovereign](http://citizensmedia.tv/mmt-developing-nations) central government use its monopoly power of currency insurance to purchase up a massive amount of real resources, therefore making it such that there are fewer available for the private (non-government) sector to purchase? Yes. That is possible. If you call that crowding out, then crowding out is possible.

If, however you’re talking about *any and all* government spending “crowding out“ private sector lending based on the assumption of “loanable funds,” then, no, this kind of crowding out does not exist. The idea of loanable funds assumes that there is only a finite pile of money available to both the government *and* private sector, from which they can “borrow.”

As long as the real resources are available for purchase, [federal government spending crowds ***in*** (augments) private spending](http://citizensmedia.tv/mmt-crowding-out). This idea of crowding out is false and predicated on three other false ideas. Briefly, it incorrectly assumes that:

1. the central government is a user of *its own* currency,
2. banks are revenue/reserve constrained (loanable funds), and
3. the interest rate is an axiomatic function of the free market.

The truth is that:

1. the central government issues currency every time it spends ([even when it sells bonds](http://neweconomicperspectives.org/2010/11/yes-deficit-spending-adds-to-private.html), which is [very misleadingly](http://citizensmedia.tv/mmt-securitization) called “borrowing”),
2. banks issue credit every time they lend, and
3. the interest rate is a [policy variable](https://www.dropbox.com/s/759h1yrxyxs2j56/Fullwiler-Interest%20Rate%20on%20the%20National%20Debt%20Is%20a%20Policy%20Variable.pdf?dl=0) of the Fed’s FOMC board. (They change it because they want to change it.) Further, since the central bank has the infinite capacity to purchase and sell bonds on the open market, they therefore have infinite control over the market interest rate.

In summary: Real crowding out is possible, financial crowding out is not.


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