According to the open-economy macroeconomic model, an increase in the Canadian government budget surplus increases Canadian net capital outflow, causes the real exchange rate of the dollar to depreciate, and increases Canadian net exports.

Question

Quizplus · Accepted Answer

An increase in the government budget surplus can lead to lower interest rates, which encourages capital outflow. This increases the supply of the Canadian dollar in the foreign exchange market, causing the real exchange rate to depreciate and making Canadian goods cheaper for foreigners, thus increasing net exports.

According to the Open-Economy Macroeconomic Model, an Increase in the Canadian