How might a budget deficit affect the balance of trade?
A)A budget deficit raises interest rates,which raises exchange rates and increases the balance of trade.
B)A budget deficit raises interest rates,which raises exchange rates and reduces the balance of trade.
C)A budget deficit reduces interest rates,which raises exchange rates and reduces the balance of trade.
D)A budget deficit reduces interest rates,which reduces exchange rates and reduces the balance of trade.

Question

Quizplus · Accepted Answer

When a country has a budget deficit, it needs to borrow money from foreign investors, which increases its demand for foreign currency. This increased demand for foreign currency raises its value relative to the domestic currency, leading to an appreciation of the exchange rate. A higher exchange rate makes exports more expensive and imports cheaper, which reduces the balance of trade. Therefore, a budget deficit raises interest rates, raises exchange rates, and reduces the balance of trade.

How Might a Budget Deficit Affect the Balance of Trade