A rise in the government budget deficit
A)increases the interest rate so in the market for foreign-currency exchange,supply shifts right.
B)increases the interest rate so in the market for foreign-currency exchange,supply shifts left.
C)decreases the interest rate so in the market for foreign-currency exchange,supply shifts left.
D)decreases the interest rate so in the market for foreign-currency exchange supply shifts right.

Question

Quizplus · Accepted Answer

A rise in the government budget deficit means the government needs to borrow more money, which increases demand for loanable funds, raising the interest rate. As a result, domestic investors will demand a higher return on their investment, causing a shift in the supply of domestic currency to the left and an increase in the exchange rate. This reduces the quantity of domestic currency demanded by foreign markets, hence shifting the supply of foreign currency to the right.

A Rise in the Government Budget Deficit