The proposition that increases in government budget deficits in an open economy tend to crowd out net exports relies on the idea that

Question

Quizplus · Accepted Answer

When the government increases its budget deficit, it will need to borrow more, which will increase demand for loanable funds and raise interest rates. This increase in interest rates will make it more attractive for foreign investors to invest in the economy, leading to an inflow of financial capital. As more foreign investors purchase domestic currency, the currency appreciates. A more expensive currency makes exports more expensive and less competitive globally, resulting in a decrease in net exports. This is why increases in government budget deficits in an open economy tend to crowd out net exports.

The Proposition That Increases in Government Budget Deficits in an Open