Cite and explain one example of the negative effect of fiscal policy.

One example of the negative effect of fiscal policy can be seen in the concept of "crowding out". This occurs when government spending, which is part of fiscal policy, does not result in an increase in aggregate demand because it is offset by a decrease in private sector spending.

Here's how it works step by step:

1. The government increases its spending to stimulate the economy. This is a fiscal policy decision.

2. To finance this spending, the government borrows money by issuing bonds.

3. This increases the demand for money in the economy, which can lead to higher interest rates.

4. Higher interest rates make borrowing more expensive for businesses and households. This can discourage private investment and consumption, which are components of private sector spending.

5. If the decrease in private sector spending is equal to the increase in government spending, then there is no increase in aggregate demand. This means the fiscal policy did not stimulate the economy as intended.

6. In this scenario, the government spending has "crowded out" private sector spending. This is a negative effect of fiscal policy because it can lead to lower economic growth than expected.

It's important to note that the extent of crowding out is a subject of debate among economists. Some argue that it is a significant concern, while others believe it is minimal or can be mitigated through proper policy design.