The crowding-out effect for an economy operating at full employment is a much more serious problem than the crowding-out effect for an economy in Blank______.

Question

Multiple choice question.

long-run equilibrium

a recessionary gap

an inflationary gap

its natural or potential state

Answer 1

The crowding-out effect for an economy operating at full employment is a much more serious problem than the crowding-out effect for an economy in a recessionary gap.

In a recessionary gap, there are underutilized resources, which means that government spending can increase overall demand without necessarily displacing private investment. In contrast, at full employment, increased government spending may lead to higher interest rates and reduced private investment, resulting in a more significant crowding-out effect.