A rise in the budget deficit
A)shifts both the supply of loanable funds in the market for loanable funds and the supply of dollars in the market for foreign-currency exchange right.
B)shifts both the supply of loanable funds in the market for loanable funds and the supply of dollars in the market for foreign-currency exchange left.
C)shifts both the demand for loanable funds in the market for loanable funds and the demand for dollars in the market for foreign-currency exchange right.
D)shifts both the demand for loanable funds in the market for loanable funds and the demand for dollars in the market for foreign-currency exchange left.

Question

Quizplus · Accepted Answer

A rise in the budget deficit means the government is borrowing more funds, increasing the demand for loanable funds. This causes the supply of loanable funds to shift left, resulting in higher interest rates. Higher interest rates attract foreign investment, increasing the demand for dollars which, in turn, increases the supply of foreign currency. Therefore, the supply of dollars in the foreign exchange market also shifts left.

A Rise in the Budget Deficit