Which of the following is true?
A)When the federal budget moves toward deficit, net exports tend to increase as a result.
B)When the federal budget moves toward deficit, net exports tend to decrease as a result.
C)When the federal budget moves toward deficit, net exports do not change as a result.
D)When the federal budget moves toward deficit, there is an indeterminate effect on net exports that results.

Question

Quizplus · Accepted Answer

When the federal budget moves toward deficit, it increases the demand for loanable funds in the economy. This, in turn, leads to a rise in interest rates, making domestic investments costlier. This results in a decrease in domestic investment and a subsequent decrease in demand for domestic goods and services. As a result, net exports are likely to decrease as exports become relatively more expensive and imports become relatively cheaper.

Which of the Following Is True