Borrowing exceeds firms decrease in borrowing

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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. Which of the following is true?

A. There is a crowding-out effect of $20 billion.

B. There is a crowding-out effect of $25 billion.

C. There is no crowding-out effect because both the government and firms are still borrowing a lot.

D. There is no crowding-out effect because the government’s increase in borrowing exceeds firms' decrease in borrowing.

Reference no: EM13896959

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