When the government borrows money,:
A) the demand for loanable funds increases, which raises interest rates and reduces borrowing by households and business.
B) the demand for loanable funds increases, which lowers interest rates and increases borrowing by households and business.
C) the demand for loanable funds decreases, which lowers interest rates and increases borrowing by households and business.
D) the demand for loanable funds decreases, which raises interest rates and reduces borrowing by households and business.

Question

Quizplus · Accepted Answer

When the government borrows money, it increases the demand for loanable funds. This higher demand typically leads to higher interest rates, making borrowing more expensive for households and businesses, thus reducing their borrowing activities. This phenomenon is known as "crowding out."

When the Government Borrows Money