Which of the following is the most likely effect of deficit spending by the government?
1) Private investment spending increases.
2) Private investment spending is crowded out.
3) Private investment spending is crowded in.
4) The government provides fewer services.
5) The government is collecting more taxes to offset spending.

Private investment spending is crowded out is the most likely effect of deficit spending by the government. In the longterm, a budget deficit would be inflationary and will have no effect on real GDP full employment.

High and rising deficits and debt can result in insistently high inflation, interest rate rises, lower economic growth, higher interest payments, less fiscal space, increased political risks, and increasing familial imbalances. Budget deficits crowd out private borrowing, rearrange cash flows and interest rates, reduce net exports, and result in increased taxes, inflation, or both. A budget deficit will cause inflation in the short run. Prices and real GDP will rise.

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