The growth rate of potential output might be decreased by an expansionary fiscal policy if
A)the policy crowds out private investment.
B)public investment has high productivity.
C)the simple multiplier is small.
D)the composition of output is not altered.
E)the budget deficits are persistent.

Question

Quizplus · Accepted Answer

An expansionary fiscal policy, which involves increased government spending and/or tax cuts, can lead to crowding out of private investment. This occurs when the increased demand for funds from the government leads to higher interest rates, making it expensive for private businesses to borrow money for investment. If private investment is crowded out, it can lead to a decrease in productivity and potential output growth.

The Growth Rate of Potential Output Might Be Decreased by an Expansionary