Which of the following is true about how trade deficits and government budget deficits are related?
A) The trade deficit leads to a reduction in investment that leads to a government budget deficit.
B) The trade deficit leads to a decline in imports relative to exports that leads to a government budget deficit.
C) The government budget deficit leads to higher interest rates that will lead to a trade deficit.
D) The government budget deficit leads to lower interest rates that will lead to a lower trade deficit.

Question

Quizplus · Accepted Answer

A government budget deficit can lead to higher interest rates, which can attract foreign capital, appreciating the currency and making exports more expensive, thus potentially leading to a trade deficit.

Which of the Following Is True About How Trade Deficits