Why is the crowding-out effect less likely to be a problem during a recession?
Multiple choice question.
Because interest rates are typically very high during a recession
Because slow sales do not encourage businesses to invest
Because businesses invest more during a recession than during an inflationary period
Because during a recession, investment is high
1 answer
The correct answer is:
Because slow sales do not encourage businesses to invest.
During a recession, demand is low, and businesses are less likely to invest in new projects, so the crowding-out effect—which occurs when government spending leads to reduced private sector investment due to higher interest rates—is less of a concern.
