If a government increases its budget deficit, which of the following best predicts the effects?
A)Interest rates rise and the trade balance moves toward surplus.
B)Interest rates rise and the trade balance moves toward deficit.
C)Interest rates fall and the trade balance moves toward surplus.
D)Interest rates fall and the trade balance moves toward deficit.

Question

Quizplus · Accepted Answer

An increase in the budget deficit typically leads to higher interest rates as the government borrows more, which can attract foreign capital, appreciating the currency and making exports more expensive, thus moving the trade balance toward deficit.

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