The crowding-out effect tends to be stronger when the economy:

Question

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The crowding-out effect occurs when an increase in government spending leads to a decrease in private investment. This happens because the increased demand for loanable funds causes interest rates to rise, making it more expensive for firms to borrow money for investment. When the economy is already at or close to full employment, there is less excess capacity in the economy, so the increased demand for loanable funds is more likely to cause a significant increase in interest rates, leading to a stronger crowding-out effect.

The Crowding-Out Effect Tends to Be Stronger When the Economy