How would an increase in the U.S.federal budget deficit affect the exchange rate in the market for dollars?
A)The exchange rate will increase.
B)The exchange rate will decrease.
C)The exchange rate will not be affected by a change in the federal budget deficit.
D)The impact of the increase in the federal budget deficit on the exchange rate cannot be predicted.

Question

Quizplus · Accepted Answer

An increase in the U.S. federal budget deficit can lead to higher interest rates as the government borrows more, attracting foreign capital and increasing demand for dollars, which can cause the exchange rate to increase.

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