Is crowding out equally likely under all economic conditions?
Explain your answer. No. The closer the economy is to its production possibilities frontier (i.e., full employment) and/or the steeper the SRAS curve, the greater the likelihood of significant crowding out. The condition of the financial market is also important. The tighter the supply of money and/or loanable funds, the greater the likelihood of reduced private borrowing in the case of a budget deficit. 11. The economy is in a recessionary gap and both Smith and Jones advocate expansionary fiscal policy. Does it follow that both Smith and Jones favor big government? Not necessarily. Expansionary fiscal policy only results in permanently larger government if the expenditure increases taken to shift the aggregate demand curve are left in place after the need for the policy has passed. Also, Smith may prefer more government spending (bigger government) while Jones prefers tax cuts (smaller government) when it comes to expansionary fiscal policy. n ANSWERS TO CHAPTER working with numbers
