If a country had capital flight, then the real exchange rate would
A)fall. To offset this fall the government could increase the budget deficit.
B)fall. To offset this fall the government could decrease the budget deficit.
C)rise. To offset this rise the government could increase the budget deficit.
D)rise. To offset this rise the government could decrease the budget deficit.

Question

Quizplus · Accepted Answer

Capital flight leads to a decrease in the demand for the domestic currency, which causes the real exchange rate to fall. To offset this fall, the government can increase the budget deficit, which will increase the demand for the domestic currency and help to stabilize the real exchange rate.

If a Country Had Capital Flight, Then the Real Exchange