If a government increases its budget deficit,then domestic interest rates
A)and net exports rise.
B)rise and net exports fall.
C)fall and net exports rise.
D)and net exports fall.

Question

Quizplus · Accepted Answer

When a government increases its budget deficit, it needs to borrow more money from the domestic economy, which increases the demand for credit and, therefore, raises interest rates. Higher interest rates make the domestic currency more attractive, which appreciates its value, making exports more expensive and imports cheaper. That will cause net exports to fall. Therefore, the correct answer is B: rise and net exports fall.

If a Government Increases Its Budget Deficit,then Domestic Interest Rates