How does the crowding out effect influence interest rates and investment spending in an economy with a persistent budget deficit?

• A. The crowding out effect decreases interest rates as the government reduces its borrowing, increasing investment spending.
• B. The crowding out effect increases interest rates as the government competes for loanable funds, reducing investment spending.
• C. The crowding out effect decreases interest rates as the government increases its borrowing, reducing investment spending.
• D. The crowding out effect has no impact on interest rates or investment spending.

Answer: (B)