The growth rate of potential output might be decreased by an expansionary fiscal policy if
A)the budget deficits are persistent.
B)the simple multiplier is small.
C)the policy crowds out private investment.
D)public investment has high productivity.
E)the composition of output is not altered.

Question

Quizplus · Accepted Answer

Expansionary fiscal policy can lead to an increase in interest rates, which can crowd out private investment and reduce the potential growth rate of the economy. Therefore, if the policy crowds out private investment, then the growth rate of potential output might be decreased.

The Growth Rate of Potential Output Might Be Decreased by an Expansionary