Increased government purchases crowd out private purchases whenever the economy is

Question

Quizplus · Accepted Answer

Increased government purchases crowd out private purchases when the economy is operating on its production possibilities curve, meaning it is at full employment and using all its resources efficiently. In such a scenario, additional government spending can lead to higher interest rates, which in turn can reduce private investment. This does not typically occur in situations of AD shortfall, serious cyclical unemployment, or when the economy is operating below full employment, as these conditions imply that there are idle resources in the economy that can be utilized without crowding out private sector activity.

Increased Government Purchases Crowd Out Private Purchases Whenever the Economy