An increase in government spending may expedite recovery from a recession in the short run, but in the long run, this policy may:

Question

Quizplus · Accepted Answer

An increase in government spending may lead to a crowding-out effect, which refers to the decrease in investment in new capital due to the increased demand for loanable funds by the government. This reduces the potential long-term economic growth of a country. Additionally, if the government spending is financed by borrowing, it may lead to an appreciation of the domestic currency, making domestic businesses less competitive in international markets. Finally, an increase in government spending may lead to an increase in interest rates, reducing consumer expenditures on cars and new houses. Therefore, all the given options are correct.

An Increase in Government Spending May Expedite Recovery from a Recession