If a government increases its budget deficit,then the real exchange rate
A)and domestic investment rise.
B)and domestic investment fall.
C)rises and domestic investment falls.
D)falls and domestic investment rises.

Question

Quizplus · Accepted Answer

When a government increases its budget deficit, it often borrows more money from foreign lenders. This increases the demand for foreign currency, which results in a higher exchange rate. However, a higher exchange rate makes the country's exports more expensive, which decreases demand for its goods and services, reducing domestic investment. Therefore, the real exchange rate rises while domestic investment falls.

If a Government Increases Its Budget Deficit,then the Real Exchange