If a country had capital flight, then the real exchange rate would
A) Fall. To offset this fall the government could increase the budget deficit.
B) Fall. To offset this fall the government could decrease the budget deficit.
C) Rise. To offset this rise the government could increase the budget deficit.
D) Rise. To offset this rise the government could decrease the budget deficit.

Question

Quizplus · Accepted Answer

Capital flight is the movement of capital out of a country. This can lead to a fall in the real exchange rate, as the demand for foreign currency increases. To offset this fall, the government could increase the budget deficit, which would increase the demand for domestic currency and help to stabilize the real exchange rate.

If a Country Had Capital Flight, Then the Real Exchange