The mechanism of "international crowding-out" is that a government budget deficit ________ the domestic interest rate,which makes the dollar ________ expensive for foreigners,which then ________ net exports.

Question

Quizplus · Accepted Answer

When a government runs a budget deficit, it typically borrows money, which increases the demand for loans and raises the interest rate. This in turn makes domestic assets more attractive to foreigners, causing an increase in the exchange rate (making the dollar appreciate) and decreasing net exports. Therefore, a budget deficit raises the interest rate, makes the currency more expensive, and reduces net exports, which is described by choice C.

The Mechanism of "International Crowding-Out" Is That a Government Budget