Question

A proposal that has significant support among policymakers regardless of political party is the need to modernize the nation's infrastructure, such as reinforcing thousands of bridges deemed structurally deficient and modernizing airports. Briefly explain why such policies might not be effective when the economy is experiencing an expansion than when it is in a recession.

Answer 1

Answer:

If the economy is experiencing an expansion, this policy would not be as effective because many of the economy's workers would already be employed in other activities. In other words, the economy would be close to, or at, full employment.

Another reason is that large public investments during an economic expansion tend to raise the interest raise, and crowd out private investment, because a big part of the supply of loanable funds would be taken up by the government. This would actually be detrimental for the economy because private investment would be less.

Finally, there is always the possibility of overheating the economy and causing it to enter an inflationary phase.