To offset the indirect crowding-out effects, a government engaging in expansionary policy aimed at eliminating a recessionary gap could
A) increase spending less than the simplest Keynesian model would predict.
B) increase spending more than the simplest Keynesian model would predict.
C) reduce taxes rather than increase government spending.
D) both reduce taxes and reduce spending to be able to achieve full employment.

Question

Quizplus · Accepted Answer

To offset the indirect crowding-out effects, which occur when government spending leads to increased interest rates and reduced investment by the private sector, a government could increase spending more than the simplest Keynesian model would predict. This is because the additional spending is needed to counteract the reduction in private investment and stimulate the economy enough to close the recessionary gap.

To Offset the Indirect Crowding-Out Effects, a Government Engaging in Expansionary