As a result of crowding out,demand-side fiscal policy may be ineffective at achieving certain macroeconomic goals.

Question

Quizplus · Accepted Answer

When the government increases its spending or decreases taxes to stimulate aggregate demand, it may lead to an increase in interest rates, which reduces private sector investment. This is known as crowding out, and it may weaken the effectiveness of fiscal policy in achieving its intended macroeconomic goals. Therefore, demand-side fiscal policy may be ineffective under crowding out conditions.

As a Result of Crowding Out,demand-Side Fiscal Policy May Be