If the crowding-out effect is strong, how will the potency of discretionary fiscal policy be affected?

Question

Quizplus · Accepted Answer

The crowding-out effect occurs when government borrowing to finance a budget deficit reduces the amount of funds available for investment in the private sector. This could lead to an increase in interest rates, making it more expensive for individuals and businesses to borrow money for investment and consumption purposes. As a result, when the crowding-out effect is strong, the potency of discretionary fiscal policy (both expansionary and contractionary) will be reduced. This is because the negative impact of higher interest rates on private investment will offset any positive effect of government spending or tax changes on aggregate demand. Therefore, the correct answer is B, "It will make fiscal policy less potent."

If the Crowding-Out Effect Is Strong, How Will the Potency