If the government ran a major deficit, and there was no noticeable effect on the level of GDP, this could be taken as evidence of
A)crowding-in.
B)structural deficit.
C)crowding-out.
D)monetary policy ineffectiveness.

Question

Quizplus · Accepted Answer

If the government is running a major deficit but there is no noticeable effect on GDP, it could be a sign of crowding-out. Crowding-out occurs when government spending causes interest rates to rise, which decreases private investment and ultimately slows economic growth. If this is not happening, it could be a sign that private investment is not being impacted, suggesting that there is no crowding-in effect. A structural deficit refers to a deficit that is built into the structure of the government's finances (e.g. if the government always has higher spending than revenue), and is not related to the current situation. Monetary policy ineffectiveness refers to a situation where monetary policy is not having the desired effect on the economy, but this is not related to deficits specifically.

If the Government Ran a Major Deficit, and There Was