The United States government is currently running a budget deficit. What would the USA and the...
The United States government is currently running a budget deficit. What would the USA and the Foreign Exchange Market's SHORT-RUN impact be on (a) the interest rate for dollar-denominated deposits (i$), (b) output in the US economy, and (c) the dollar-euro exchange rate against all foreign currencies (E$/F).
Homework Answers
(a) A budget deficit in US will increase government borrowing for deficit financing. Higher borrowing will increase the interest rate on dollar-denominated assets.
(b) Higher interest rate will dampen consumption and investment, lowering aggregate demand, which will reduce output.
(c) Higher interest rate will increase foreign investment in US, increasing the demand for dollar. This will appreciate dollar and increase dollar-euro exchange rate.
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The United States government is currently running a budget
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