Following an increase in the Canadian budget deficit, it has been observed that the trade deficit has increased, the Canadian real exchange rate has appreciated, the net capital outflow has decreased, and the interest rate has decreased. Which event is contrary to what the open-economy macroeconomic model predicts concerning the effects of an increase in the budget deficit?
A) The trade deficit has increased.
B) The real exchange rate has appreciated.
C) The net capital outflow has decreased.
D) The interest rate has decreased.

Question

Quizplus · Accepted Answer

According to the open-economy macroeconomic model, an increase in the budget deficit would lead to higher interest rates due to increased demand for loanable funds. The observed decrease in interest rates is contrary to this prediction.

Following an Increase in the Canadian Budget Deficit, It Has