Suppose that the government of Jordan raises its budget deficit. Which of the following best predicts the effects of this action?
A)The real exchange rate of the Jordanian dinar would depreciate, and Jordanian net exports would rise.
B)The real exchange rate of the Jordanian dinar would depreciate, and Jordanian net exports would fall.
C)The real exchange rate of the Jordanian dinar would appreciate, and Jordanian net exports rise.
D)The real exchange rate of the Jordanian dinar would appreciate, and Jordanian net exports fall.

Question

Quizplus · Accepted Answer

An increase in the budget deficit can lead to higher interest rates, attracting foreign capital, causing the real exchange rate to appreciate, which makes exports more expensive and imports cheaper, leading to a fall in net exports.

Suppose That the Government of Jordan Raises Its Budget Deficit