If the crowding-out effect is strong, how will the potency of discretionary fiscal policy be affected?
A) It will make fiscal policy more potent.
B) It will make fiscal policy less potent.
C) The potency of fiscal policy will be unaffected.
D) The potency of expansionary fiscal policy will be reduced, but that of restrictive fiscal policy will be enhanced.

Question

Quizplus · Accepted Answer

If the crowding-out effect is strong, it means that government borrowing to finance its spending increases the interest rate which reduces private investment. This makes it difficult for discretionary fiscal policy to stimulate the economy since any increase in government spending will be offset by a decrease in private investment, thus making fiscal policy less potent.

If the Crowding-Out Effect Is Strong, How Will the Potency