Multiple Choice Question

Question

Which of the following is a potential flaw of fiscal policy?
Multiple choice question.

The multiplier effect

The crowding-out effect

The consumption effect

The government spending effect

Answer 1

The potential flaw of fiscal policy from the options provided is:

The crowding-out effect

This effect occurs when increased government spending leads to a reduction in private sector spending, often because the government borrows funds, which raises interest rates and diminishes private investment.