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Social ScienceIn January, the interest rate is 5 percent and firms borrow $ 50 billion per month for investment projects. In February, the federal governmnet 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. Which of the following is true? A). There is no crowding-out effect because the government's increase in borrowing exceeds firms' decrease in borrowing. B) There is a crowding-out effect of $20 billion. C) There is a crowding-out effect of $ 25 billion. D). There is no crowding-out effect because both the government and firms are still borrowing a lot.
In January, the interest rate is 5 percent and firms borrow $ 50 billion per month for investment projects. In February, the federal governmnet 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.
Which of the following is true?
A). There is no crowding-out effect because the government's increase in borrowing exceeds firms' decrease in borrowing.
B) There is a crowding-out effect of $20 billion.
C) There is a crowding-out effect of $ 25 billion.
D). There is no crowding-out effect because both the government and firms are still borrowing a lot.
Expert Answer
Crowding out effect is a scenario in which a increase in the interest rate leads to a fall in the investment spending by the private sector such that it reduces the initial increase in the total investment spending.
In this ca...
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