The risk of crowding out is greater the closer the economy is to full employment.
If the economy were operating at full employment,crowding out would be inevitable.At full employment,we would be on the production possibilities curve,using all available resources.Therefore,additional government purchases can occur only if private sector purchases are reduced.In real terms,crowding out implies less private sector output.If the economy is in recession,it is possible to get more public sector output (like highways,schools,or defense)without cutbacks in private sector output.

Question

Quizplus · Accepted Answer

Crowding out occurs when government spending increases lead to a decrease in private sector spending, which can result in a decrease in private sector output. This is more likely to happen when the economy is operating at or close to full employment because there are fewer available resources for the government to use without taking away from the private sector. In a recession, there may be more slack in the economy and fewer resources being used, making it possible for the government to increase spending without crowding out the private sector.

The Risk of Crowding Out Is Greater the Closer the Economy