Both the crowding-out effect and new classical model indicate that
A) expansionary fiscal policy is a highly effective weapon with which to fight an economic downturn.
B) restrictive fiscal policy is a highly effective weapon with which to control inflation caused by excess demand.
C) there are side effects of budget deficits that will substantially, if not entirely, offset their expansionary impact on aggregate demand.
D) fiscal policy can be used effectively to restrain inflation but it is largely ineffective as a weapon against recession.

Question

Quizplus · Accepted Answer

Both the crowding-out effect and the new classical model suggest that the impact of government spending on the economy may be less effective than anticipated due to side effects such as higher interest rates and inflation. Therefore, while expansionary fiscal policy can stimulate demand in the short run, it may also lead to higher deficits and debt levels that could limit future growth and create economic instability. Restrictive fiscal policy, on the other hand, may help to control inflation caused by excess demand, but it can also lead to lower output and employment in the short run. Overall, the key point is that fiscal policy has both benefits and costs that need to be carefully weighed and evaluated in light of the specific economic situation and policy goals.

Both the Crowding-Out Effect and New Classical Model Indicate That