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

According to the theory of crowding out, an increase in government spending leads to an increase in demand for loanable funds, which in turn puts upward pressure on interest rates. Higher interest rates attract financial capital from other countries, which increases the demand for the domestic currency and causes it to appreciate. This makes exports more expensive and less competitive, leading to a decrease in net exports. Therefore, choice A is the best answer as it explains how an increase in government budget deficits in an open economy tends to crowd out net exports.

The Proposition That Increases in Government Budget Deficits in an Open