If _____, expansionary fiscal policy is most likely to crowd out private spending.
A) the unemployment rate is 15%
B) aggregate income is $500 billion above its potential level
C) aggregate income is $800 billion below its potential level
D) aggregate output is $300 billion below its potential level

Question

Quizplus · Accepted Answer

Expansionary fiscal policy is designed to increase aggregate demand, but if aggregate income is already above its potential level, then there is little room for further growth without causing inflation. In this case, the government's increased spending would likely compete with private spending for resources, resulting in crowding out. Choices A, C, and D all suggest that there is slack in the economy and room for expansionary fiscal policy to boost growth without causing crowding out.

If _____, Expansionary Fiscal Policy Is Most Likely to Crowd