The crowding-out effect is
A)strongest when the economy is at full employment.
B)strongest when the economy is in a deep recession.
C)weakest when there is demand-pull inflation.
D)equally strong, regardless of the state of the macroeconomy.

Question

Quizplus · Accepted Answer

The crowding-out effect is strongest when the economy is at full employment because government borrowing can lead to higher interest rates, which reduces private investment. In a deep recession, there is more idle capacity, and the effect is weaker.

The Crowding-Out Effect Is