If a government started with a budget deficit and moved to a surplus,domestic investment
A)and the real exchange rate would rise.
B)and the real exchange rate would fall.
C)would rise and the real exchange rate would fall.
D)would fall and the real exchange rate would rise.

Question

Quizplus · Accepted Answer

When a government moves from a budget deficit to a surplus, it implies that they are spending less than they are earning. This means that there will be less demand for credit and the interest rates will fall, making it cheaper for businesses to borrow and invest. This leads to an increase in domestic investment. As domestic investment rises, it leads to an increase in demand for domestic currency which will cause the real exchange rate to fall.

If a Government Started with a Budget Deficit and Moved