Macroeconomics 20th Edition by Campbell McConnell ,Stanley Brue ,Sean Flynn

Exercise 21

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 no crowding-out effect because the government's increase in borrowing exceeds firm's decrease in borrowing.
B) There is a crowding-out effect of $20 billion.
C) There is no crowding-out effect because both the government and firms are still borrowing a lot.
D) There is a crowding-out effect of $25 billion.