6. 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? LO33.6

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 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.