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-Which of the following statements is not correct when the government runs a budget deficit?

Question

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-Which of the following statements is not correct when the government runs a budget deficit?

Quizplus · Accepted Answer

When the government runs a budget deficit, it typically borrows from the public by issuing bonds. This increases the demand for loanable funds, which in turn increases the interest rate. A higher interest rate makes domestic assets more attractive to foreign investors and can lead to an increase in net foreign investment. However, a budget deficit does not necessarily lead to an appreciation of the real exchange rate, as this depends on other factors such as the elasticity of demand for imports and exports. Therefore, statement C is not correct.

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