Expansionary fiscal policy can reduce real growth if the increase in government spending:
A) causes a large enough increase in private spending.
B) causes a large enough decrease in private spending.
C) is believed to be temporary.
D) is believed to be permanent.

Question

Quizplus · Accepted Answer

An increase in government spending may cause a crowding-out effect, where higher government borrowing drives up interest rates, reducing private investment and consumption, ultimately decreasing real growth. If this effect is stronger than the stimulatory effect of increased government spending, then overall growth may still be reduced.

Expansionary Fiscal Policy Can Reduce Real Growth If the Increase