If a government increases its budget deficit, which of the following best predicts the effects?
A)The real exchange rate and domestic investment rise.
B)The real exchange rate and domestic investment fall.
C)The real exchange rate rises and domestic investment falls.
D)The real exchange rate falls and domestic investment rises.

Question

Quizplus · Accepted Answer

When a government increases its budget deficit, it tends to lead to an increase in the demand for foreign goods and services, which will, in turn, cause a rise in the real exchange rate. This will make domestic goods and services relatively more expensive and less competitive, leading to a fall in domestic investment.

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