If the crowding-out effect is at its maximum strength, it follows that an increase in government spending will
A) cause aggregate demand and GDP to increase.
B) cause aggregate demand and GDP to decrease.
C) not affect aggregate demand and GDP.
D) not cause the budget deﬁcit to increase.

Question

Quizplus · Accepted Answer

When the crowding-out effect is at its maximum, increased government spending leads to a complete offset by reduced private investment, leaving aggregate demand and GDP unchanged.

If the Crowding-Out Effect Is at Its Maximum Strength, It