When the central government runs a budget deficit, the economy runs the risk of ________; this phenomenon is called ________.

Question

Quizplus · Accepted Answer

When the central government runs a budget deficit, it needs to borrow money from other countries which increases the demand for foreign currency, ultimately leading to a depreciation of the currency. This makes imports more expensive and exports relatively cheaper, leading to an increase in imports and a decrease in exports, resulting in a trade deficit. The combination of a budget deficit and trade deficit is referred to as twin deficits.

When the Central Government Runs a Budget Deficit, the Economy