If a government of a country with a zero trade balance increases its budget deficit,then the real exchange rate
A)appreciates and there is a trade surplus.
B)appreciates and there is a trade deficit.
C)depreciates and there is a trade surplus.
D)depreciates and there is a trade deficit.

Question

Quizplus · Accepted Answer

An increase in the budget deficit can lead to higher interest rates, attracting foreign capital and causing the currency to appreciate. This makes exports more expensive and imports cheaper, leading to a trade deficit.

If a Government of a Country with a Zero Trade