If a government increases its budget deficit, which statement would best predict the effects?
A) Interest rates rise, and the real exchange rate appreciates.
B) Interest rates fall, and the real exchange rate depreciates.
C) Interest rates rise, and the real exchange rate depreciates.
D) Interest rates fall, and the real exchange rate appreciates.

Question

Quizplus · Accepted Answer

When a government increases its budget deficit, typically by spending more or taxing less, it often borrows more from the public. This increased demand for loanable funds tends to push up interest rates. Higher interest rates attract foreign capital, leading to an appreciation of the real exchange rate.

If a Government Increases Its Budget Deficit, Which Statement Would