If a country's budget deficit increases,then in the market for foreign-currency exchange,
A)the supply of its currency shifts right,so the exchange rate falls.
B)the demand for its currency shifts right,so the exchange rate rises.
C)the supply of its currency shifts left,so the exchange rate rises.
D)the demand for its currency shifts left.so the exchange rate falls.

Question

Quizplus · Accepted Answer

When a country's budget deficit increases, there is an increased demand for foreign currency to finance the deficit. This means that the country must sell more of its currency on the foreign exchange market, thus increasing the supply of its currency. As a result, the equilibrium exchange rate shifts to the right, causing the value of the country's currency to decrease (i.e., the exchange rate rises). Therefore, choice C (the supply of its currency shifts left, so the exchange rate rises) is the best choice.

If a Country's Budget Deficit Increases,then in the Market for Foreign-Currency