In the mainstream view, the crowding-out effect from the use of ﬁscal policy is
A) small, especially during a recession.
B) large, especially during a recession.
C) large because the velocity of money is high.
D) small because the velocity of money is low.

Question

Quizplus · Accepted Answer

The mainstream view holds that the crowding-out effect from the use of fiscal policy is relatively small, especially during a recession. This is because during a recession, there is usually excess capacity in the economy, and therefore increased government spending does not necessarily lead to higher interest rates or inflation. Additionally, during a recession, there may be a lower demand for credit by the private sector, which can further mitigate the crowding-out effect.

In the Mainstream View, the Crowding-Out Effect from the Use