Answer to Question 1
Crowding out refers to government deficit spending financed by borrowing that increases interest rates and thereby reduces private borrowing and spending. The crowding out effect probably exists, but to what extent is debatable. If deficit spending is used to increase our nation's production possibilities through public investment in infrastructure, then the crowding out effect is reduced. However, history shows that rarely is there a significant amount of any deficit allocated toward productive-enhancing public investment infrastructure. The extent of a crowding-out effect is important because any crowding out renders fiscal policy less effective in stimulating the economy during a recession.
Answer to Question 2
d
