Which of the following was a justification for breaking with the normal presumption against using discretionary fiscal policy during the Great Recession?
A)Monetary policy would not be effective because interest rates were so high.
B)Crowding-out was not likely to be a problem in a very depressed economy with interest rates near zero.
C)The economy was so depressed that a political business cycle was not likely to be a problem.
D)Ricardian equivalence was likely if monetary policy was used alone.

Question

Quizplus · Accepted Answer

The justification for breaking with the normal presumption against using discretionary fiscal policy during the Great Recession was that crowding-out was not likely to be a problem in a very depressed economy with interest rates near zero. A depressed economy has a high level of unemployment and excess capacity, which means that an increase in government spending would not displace private spending but rather would lead to an increase in overall spending and economic activity. Therefore, the normal presumption against using discretionary fiscal policy could be broken.

Which of the Following Was a Justification for Breaking with the Normal