12. Suppose that, in January, the interest rate is 5 percent and firms borrow $50 billion per month for investment projects. In February, the federal government doubles its monthly borrowing from $25 billion to $50 billion. That drives the interest rate up to 7 percent. As a result, firms cut back their borrowing to only $30 billion per month. Answer by filling blanks below. There is a crowding-out effect of $20 billion. A crowding-out effect occurs when increased government borrowing drives ( down, up ) interest rates and thereby reduces investment by firms. That is in this scenario, where the government's decision to double its monthly borrowing drives up the interest rate from 5 to 7 percent, causing firms to cut back on their investment spending by $ 5 percent interest rate – $ billion per month (= $ billion per month at the new 7 percent interest rate). billion per month at the old

12. Suppose that, in January, the interest rate is 5 percent and firms borrow $50 billion per month for investment projects. In February, the federal government doubles its monthly borrowing from $25 billion to $50 billion. That drives the interest rate up to 7 percent. As a result, firms cut back their borrowing to only $30 billion per month. Answer by filling blanks below. There is a crowding-out effect of $20 billion. A crowding-out effect occurs when increased government borrowing drives ( down, up ) interest rates and thereby reduces investment by firms. That is in this scenario, where the government's decision to double its monthly borrowing drives up the interest rate from 5 to 7 percent, causing firms to cut back on their investment spending by $ 5 percent interest rate – $ billion per month (= $ billion per month at the new 7 percent interest rate). billion per month at the old

ECON MACRO

5th Edition

ISBN:9781337000529

Author:William A. McEachern

Publisher:William A. McEachern

Chapter12: Federal Budgets And Public Policy

Section: Chapter Questions

Problem 3.8P

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