Which would tend to reduce the crowding-out effect that occurs when the federal government increases its borrowing to ﬁnance a deﬁcit?
A) The economy is operating at full employment.
B) The economy is operating at less than full employment.
C) The expenditures fail to contribute to the development of human capital.
D) The deﬁcit ﬁnancing reduces the proﬁt expectations of business ﬁrms.

Question

Quizplus · Accepted Answer

When the economy is operating at less than full employment, an increase in government borrowing to finance a deficit may actually stimulate economic growth by increasing demand for goods and services, thereby reducing the crowding-out effect. In contrast, when the economy is at full employment, an increase in government borrowing may cause interest rates to rise, which can lead to a decrease in private investment and a contraction in economic growth.

Which Would Tend to Reduce the Crowding-Out Effect That Occurs