Following an increase in the Canadian budget deficit,it has been observed that the trade deficit has increased,the Canadian real exchange rate has appreciated,the net capital outflow has decreased,and the interest rate has decreased.Which one of these events is contrary to what the open-economy macroeconomic model predicts concerning the effects of an increase in the budget deficit?
A)The trade deficit has increased.
B)The real exchange rate has appreciated.
C)The net capital outflow has decreased.
D)The interest rate has decreased.

Question

Quizplus · Accepted Answer

An increase in the budget deficit typically leads to higher interest rates, not lower, as the government borrows more, increasing demand for loanable funds.

Following an Increase in the Canadian Budget Deficit,it Has Been