Question

In: Economics

Following an increase in the Canadian budget deficit, it has been observed that the trade deficit...

Following an increase in the Canadian budget deficit, it has been observed that the trade deficit has increased, the Canadian real exchange rate has appreciated, the net capital outflow has decreased, and the interest rate has decreased. Which one of these events is contrary to what the open-economy macroeconomic model predicts concerning the effects of an increase in the budget deficit?

a. The interest rate has decreased.

b. The real exchange rate has appreciated.

c. The net capital outflow has decreased.

d. The trade deficit has increased.

Solutions

Expert Solution

d.

The interest rate has decreased.

The trade deficit is the difference between the export amount and the import amount. An increase in Budget deficit refers to the situation when the difference between the revenue and the expenditure for the government is high. That means the government has less revenue than the expenditures. The government has less revenue and revenue comes from taxes or the interest rate. So the interest rate has been decreased.

Rahul Sunny answered 2 years ago
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