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Which of these effects of expansionary spending would a government most want to avoid?

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When a government engages in expansionary spending, it typically aims to stimulate economic growth, reduce unemployment, and increase overall demand in the economy. However, there are several potential negative effects that a government may want to avoid:

  1. Inflation: One of the most significant risks of expansionary spending is the potential for rising inflation. If the economy is already operating near its capacity, increased spending can lead to higher prices rather than increased output.

  2. Crowding Out: When the government increases its spending, it may lead to higher interest rates as the government borrows more to finance its expenditures. This can discourage private investment, as businesses may find it more expensive to finance their projects.

  3. Increased National Debt: Expansionary spending often requires borrowing, which can lead to a significant increase in national debt. High levels of debt can have long-term implications for fiscal policy and economic health.

  4. Diminished Returns: Over time, the effectiveness of government spending may diminish, leading to the phenomenon known as the "multiplier effect," where additional spending generates a progressively smaller increase in economic output.

  5. Dependency on Government Stimulus: Prolonged periods of expansionary spending can create a dependency on government support, reducing the incentives for individuals and businesses to engage in productive economic activities.

Thus, among these effects, managing inflation tends to be a primary concern that a government would want to avoid, particularly if it undermines the economic stability and purchasing power of its citizens.

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