Graph 13-2 -In Graph 13-2, an increase in the government budget deficit causes the equilibrium in the economy to move from: A)A to B in panel (a) and from E₁ to E₂ in panel (c) B)B to A in panel (a) and from E₂ to E₁ in panel (c) C)A to B in panel (a) and from E₂ to E₁ in panel (c) D)B to A in panel (a) and from E₁ to E₂ in panel (c)

Question

Quizplus · Accepted Answer

An increase in the government budget deficit typically leads to higher interest rates, which in turn attracts foreign capital, appreciating the domestic currency. This scenario is consistent with moving from A to B in a panel that likely represents the goods market (with an increase in demand) and from E₁ to a point like E₂ in another panel that likely represents the foreign exchange market, where the domestic currency appreciates.

Graph 13-2 -In Graph 13-2, an Increase in the Government Budget Deficit