If a government increases its budget deficit, which of the following best predicts the effects?
A)The real exchange rate appreciates, and the trade balance moves toward surplus.
B)The real exchange rate appreciates, and the trade balance moves toward deficit.
C)The real exchange rate depreciates, and the trade balance moves toward surplus.
D)The real exchange rate depreciates, and the trade balance moves toward deficit.

Question

Quizplus · Accepted Answer

An increase in the budget deficit can lead to higher interest rates, attracting foreign capital, which appreciates the real exchange rate and can worsen the trade balance, moving it toward deficit.

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