I: The twin deficits prediction is the proposition that a country with a large government budget deficit is likely to have a large trade deficit.II: An increase in foreign interest rates will cause changes in a small open economy that are consistent with the twin deficits prediction.
A) I is true; II is not.
B) II is true; I is not.
C) Both I and II are true.
D) Neither I nor II is true.

Question

Quizplus · Accepted Answer

The twin deficits prediction is a controversial proposition, with evidence both supporting and questioning its validity. Therefore, statement I is not entirely true. On the other hand, statement II is not consistent with the twin deficits hypothesis because it suggests that an increase in foreign interest rates might improve a small open economy's current account balance through the portfolio balance effect, even if it leads to higher government budget deficits, contradicting the twin deficits prediction.

I: the Twin Deficits Prediction Is the Proposition That a Country