When fiscal policymakers do intervene in the economy, there are often unintended consequences (e.g., multiplier and crowding-out effects).

Explain how these effects might play out, through specific GDP expenditure components, if the government were to increase expenditures, for instance, by $50 billion.

The intervention of fiscal policymakers in the economy leads to consequences like a multiplier and crowding-out effects, as stated in the question. When, in the economy, the government increases its expenditures, the multiplier increases the gross domestic product (GDP) by a higher proportion.

On the other hand, crowding-out effects lead to a reduction in investment spending by private investors, given an increase in public spending. For example, if the government increases its expenditures by $50 billion, then the GDP will not increase by $50 billion. The multiplier effect will lead to an increase in the GDP by a higher proportion. If the value of the multiplier is 10, then the GDP will increase by $500 billion.

Note that the value of the multiplier depends upon the marginal propensity to consume. Similarly, the crowding-out of private investments is due to lower returns in the economy. If the government increases the money supply in the economy, the result will be a decrease in the value of money, due to inflation. Thus, private investments will decrease as a reduction in the value of money will not attract private investors.