Figure 19-10

-Refer to Figure 19-10.Suppose that the U.S.government deficit decreases,causing interest rates in the United States to fall relative to those in the European Union.Assuming all else remains constant,how would this be represented?

Question

Figure 19-10
 
-Refer to Figure 19-10.Suppose that the U.S.government deficit decreases,causing interest rates in the United States to fall relative to those in the European Union.Assuming all else remains constant,how would this be represented?

Quizplus · Accepted Answer

A decrease in the U.S. government deficit would lead to a decrease in interest rates in the United States, making it less attractive for foreign investors to hold U.S. financial assets. As a result, demand for U.S. dollars would decrease, causing the supply of dollars in the foreign exchange market to increase. This would lead to a depreciation of the dollar and an appreciation of the euro. Choice B correctly represents this scenario, where the economy moves from point C to point B to point A.

Figure 19-10 -Refer to Figure 19-10.Suppose That the U.S.government Deficit Decreases,causing Interest