If policymakers implement an expansionary fiscal policy but do not take into account the potential for crowding out,the new equilibrium level of GDP is likely to
A)be at potential GDP.
B)be above potential GDP.
C)be below potential GDP.
D)There is insufficient information given here to draw a conclusion.

Question

Quizplus · Accepted Answer

Expansionary fiscal policy, such as increased government spending or tax cuts, can lead to higher interest rates, which may crowd out private investment. This reduction in investment can limit the policy's effectiveness in boosting GDP, potentially resulting in a GDP level below potential.

If Policymakers Implement an Expansionary Fiscal Policy but Do Not