The paper presents an expanded analysis of the portfolio crowding out effect. It was tacitly assumed in the model presented in "Bank i Kredyt" No. 1/2005, following the IS-LM standard model, that Treasury securities and physical capital constitute perfect substitutes. This assumption is abandoned below.

The model presented in the paper is a modification of B. Friedman's model (1978). The main difference involves the abandonment of the simplifying assumption that the available capital is constant, i.e. it does not depend on the volume of investment outlays. This slight modification removes the error of the initial model, i.e. the impossibility of regaining equilibrium by the economy following a shock. Nobody, to the best of the author's knowledge, has referred to the error before while the error itself was significant. It followed from the standard version of the model that the transition from an equilibrium to a deficit should result in unceasing changes in interest rates and the GDP level.

Benjamin Friedman (1978) presented only the final result of the algebraic solution of the model. Urszula Kosterna (1995) showed a graphic solution and described selected conclusions. This paper includes a full algebraic solution. It presents not only the conclusions, but also a comprehensive overview of the reasoning process. Such a presentation form is especially useful for this model since at least some types of relations stemming from the model are not intuitively obvious.

The paper body includes 2 chapters.

• The first chapter describes the impact of demand on individual types of assets.
• The second chapter presents the influence of the lack of perfect substitution among the assets on the transaction and portfolio crowding out effect.

The most important conclusions drawn from the model were summarized in the last part of the paper. A short explanation of difficulties with the empirical support for the influence of fiscal impulses on investment is also offered.