Question

If an economy is in a recession and the government opts for an expansionary fiscal policy to shift AD closer to potential output, an economist with a typical functional finance view who acknowledges partial crowding out would conclude that the AD:

Answer 1

Shifts to the right as a result of increase in government expenditure

Step-by-step explanation:

An economist with functional finance view is one that has experience or training in finance related field. An economist that acknowledges partial crowding out is one that is persuaded that government cannot spend its way out of recession without a crowding out effect.

Crowding out is when government spending reduces investment spending by the private sector. Therefore an economist with this mindset will naturally conclude that aggregate demand Shifts to the right as a result of increase in government expenditure.