What does macroeconomic theory predict as the main economic effect of a reduction in the budget deficit?
A)Lower real interest rates
B)A drop in the exchange rate
C)An increase in net exports
D)All of these responses are correct.

Question

Quizplus · Accepted Answer

According to macroeconomic theory, a reduction in the budget deficit would lead to lower demand for borrowing, which in turn would lead to lower real interest rates (option A). Lower real interest rates would discourage foreign investment in the economy, which would cause the exchange rate to drop (option B). A drop in the exchange rate would make exports cheaper and increase the competitiveness of domestic firms, thus increasing net exports (option C). Therefore, all of these responses are correct (option D).

What Does Macroeconomic Theory Predict as the Main Economic Effect