Q. Consider the following:
1.When an economy is experiencing a severe recession
2.When there is deflation
In Which of the above Situations is Crowding out effect most likely to occur?
Answer: D
Notes:
When an economy is experiencing a severe recession, crowding out is the least likely to occur. During severe downturns, there is significantly less private investment spending. Less investment spending means there is less competition for funds if the government borrows to finance deficit spending.
Deflation usually occurs only during severe recessions. During severe downturns, there is significantly less private investment spending. Less investment spending means there is little competition for funds if the government borrows to finance deficit spending.
Source- Article
