If a government increases its budget deficit, which of the following best predicts the effects?
A)Interest rates rise and the real exchange rate appreciates.
B)Interest rates fall and the real exchange rate depreciates.
C)Interest rates rise and the real exchange rate depreciates.
D)Interest rates fall and the real exchange rate appreciates.

Question

Quizplus · Accepted Answer

When a government increases its budget deficit, it often borrows more, leading to higher demand for loanable funds, which can cause interest rates to rise. Higher interest rates attract foreign capital, increasing demand for the domestic currency and causing the real exchange rate to appreciate.

If a Government Increases Its Budget Deficit, Which of the Following