Ceteris paribus,an increase in the government budget deficit increases interest rates in the United States and causes a real appreciation of the dollar.

Question

Quizplus · Accepted Answer

When the government increases its budget deficit, it means that it is borrowing more money to finance its spending. As a result, the supply of bonds in the market increases, driving down their price and raising their yield (i.e. interest rates). This increase in interest rates makes the dollar more attractive to foreign investors, who will demand more dollars to invest in US bonds. This increased demand for dollars causes its value to appreciate (i.e. a real appreciation of the dollar).

Ceteris Paribus,an Increase in the Government Budget Deficit Increases Interest