Suppose that the Canadian budget deficit rises. At the same time the Canadian trade deficit grows larger, the real exchange rate of the dollar appreciates, and Canadian net capital outflow decreases. Which of these events is contrary to what the open-economy macroeconomic model predicts concerning the effects of an increase in the budget deficit?
A)The Canadian trade deficit grew.
B)The real exchange rate of the dollar appreciated.
C)Canadian net capital outflow fell.
D)The supply of dollars in the foreign exchange market increased.

Question

Quizplus · Accepted Answer

An increase in the budget deficit typically leads to a decrease in national savings, which reduces the supply of dollars in the foreign exchange market, not an increase.

Suppose That the Canadian Budget Deficit Rises