# 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.

Question

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.