So, how important is this crowding out, how much actually happens?
There's a huge debate here, but what is likely in this
box, is that we're going to see at the end of
the policy when all of these different changes worked themselves out
through the real economy, a bigger public sector, a smaller private sector.
And this may not be the best thing for the long run growth, and productivity of
the economy because usually the private sector is
better than the public sector, overall, at creating jobs.
At innovating, at raising productivity.
So, you know, this is something crowding out
that we don't want to see for very long periods.
Now, on the lower right hand corner we have the other combination of
the four that we offered here, which is another one of opposing policies.
Policies colliding each other in the real economy.
In this case, we have restrictive fiscal, and expansive monetary.
In other words what's going on here, is maybe something similar
to what we saw in the other box, box three, right?
Where there is, maybe there's a recessionary
gap, maybe there's even an inflationary gap, okay?
But the two authorities are disagreeing on how
to address it for whatever reason and so.
Maybe the government, concerned about its deficit,
okay, is saying, I think I'm going to withdraw.
I'm going to raise taxes, cut government spending.
I have to take care of this deficit.
Alright?
Even though there's a recessionary gap, I need to
prevent my deficit, my debt, from growing too much.
The monetary authority, on the other hand, the
central bank, says, this is a recessionary gap.
I need to stimulate this economy.
And so I'm going to do what I can, which
is acting through the money supply, cut interest rates, okay.
So again, it's hard for us to predict exactly what will
happen to GDP, because the restrictive fiscal is reducing aggregate demand.
Alright?
And the expansive monetary is increasing it.
Will we stay at the same place?
Maybe.
Will we grow a little bit?
It's possible.
Will we shrink a little bit?
It's possible, depending on the relative magnitude of fiscal
and monetary policy and their effects, but what will
happen in this quadrant is we're getting something that,
just to give an opposite term, to crowding out.
Some people call crowding in, okay.
Down in this square what you're finding is the
public sector is withdrawing somewhat because it's cut government spending.