The crowding out effects of fiscal policy are smaller if:
A) real GDP growth is above the economy's long-run potential rate.
B) nominal wages and prices are flexible.
C) the economy is in a recession caused by low aggregate demand.
D) the spending multiplier is also smaller.

Question

Quizplus · Accepted Answer

The crowding out effect of fiscal policy is smaller if the economy is in a recession caused by low aggregate demand because there is more unused capacity in the economy, and increased government spending can stimulate demand without leading to inflationary pressures or significant increases in interest rates that would crowd out private investment.

The Crowding Out Effects of Fiscal Policy Are Smaller If