If the United States increased its budget deficit, and it is at or near full employment, the most likely effect is to crowd
A)in investment and crowd out net exports.
B)out investment and crowd in net exports.
C)in investment and crowd in net exports.
D)out investment and crowd out net exports.

Question

Quizplus · Accepted Answer

If the United States increases its budget deficit while it is at or near full employment, this would lead to higher interest rates. This would discourage investment as it becomes more expensive to borrow money. As a result, investors would be crowded out, meaning they would reduce their investments. On the other hand, higher interest rates would make the US dollar more attractive, leading to an appreciation in the exchange rate. This would lead to a decrease in net exports, as US goods become more expensive for foreigners to buy. Therefore, the most likely effect would be to crowd out investment and crowd out net exports, which is option D.

If the United States Increased Its Budget Deficit, and It