Which of the following is TRUE about how trade deficits and government budget deficits are related?
A) The trade deficit leads to a reduction in investment that leads to a government budget deficit.
B) The trade deficit leads to a decline in imports relative to exports that leads to a government budget deficit.
C) The government budget deficit leads to higher interest rates that will lead to a trade deficit.
D) The government budget deficit leads to lower interest rates that will lead to a lower trade deficit.

Question

Quizplus · Accepted Answer

The government budget deficit can lead to higher interest rates as the government borrows more to finance its deficit. Higher interest rates can attract foreign capital, leading to an appreciation of the domestic currency, making exports more expensive and imports cheaper, thus potentially leading to a trade deficit.

Which of the Following Is TRUE About How Trade Deficits