Final answer:
option b,Reducing the crowding-out effect is more likely when the economy operates at less than full employment because the government spending does not compete as much with the private sector and doesn't push up interest rates significantly.
Step-by-step explanation:
To reduce the crowding-out effect that occurs when the federal government increases its borrowing to finance a deficit, the most effective condition would be if the economy is operating at less than full employment. In such a scenario, there are idle resources and unemployment, implying that the government's increased spending does not compete as much with the private sector for finite resources. Therefore, when the government borrows to finance its deficit, it is less likely to drive up interest rates and crowd out private investment since the economy has the capacity to absorb the additional spending without creating excess demand for financial capital.
The crowding-out effect occurs when the federal government increases its borrowing to finance a deficit, resulting in less financial capital available for private investment in physical capital. To reduce this effect, the answer choice that would be most effective is b. The economy is operating at less than full employment. When the economy is not at full employment, there is unused capacity, and increased government borrowing can help stimulate the economy by creating jobs and increasing demand.