When a country runs a government budget deficit
A)the real exchange rate of its currency and its net exports increase.
B)the real exchange rate of its currency and its net exports decrease.
C)the real exchange rate of its currency increases and its net exports decrease.
D)the real exchange rate of its currency decreases and its net exports increase.

Question

Quizplus · Accepted Answer

When a country runs a government budget deficit, it needs to borrow money. This increases the demand for loanable funds, causing interest rates to rise. As a result, the currency of the country appreciates, making its exports more expensive and less competitive in foreign markets. This decreases net exports, leading to a decrease in overall economic growth. Hence, the real exchange rate of its currency increases and its net exports decrease.

When a Country Runs a Government Budget Deficit