Question

The crowding-out effect is Multiple Choice strongest when the economy is at full employment. weakest when there is demand-pull inflation. strongest when the economy is in a deep recession. equally strong, regardless of the state of the macroeconomy.

Answer 1

The crowding-out effect is strongest when the economy is at full employment.

Step-by-step explanation:

The crowding out effect refers to an economic theory which argues that a rising public sector spending drives down or even eliminates private sector spending.

The three main reasons for the occurrence of crowding out effect are:

• economics,
• social welfare, and
• infrastructure.

Crowding out is most effective when an economy is already at potential output or full employment. Then the government's expansionary fiscal policy will encourage price increases, which will lead to an increased demand for money.