In the 1980s, the U.S. government budget deficit rose. At the same time the U.S. trade deficit grew larger, the real exchange rate of the dollar appreciated, and U.S. net capital outflow decreased. Which of these events is contrary to what the open-economy macroeconomic model predicts concerning the effects of an increase in the budget deficit?

Question

Quizplus · Accepted Answer

The open-economy macroeconomic model predicts that an increase in the budget deficit will lead to a decrease in national savings, causing the real exchange rate to appreciate, the trade deficit to grow, and net capital outflow to decrease. Therefore, none of the events listed are contrary to the model's predictions.