Which of the following is not a possible consequence of chronic large budget deficits?
The exchange rate might appreciate too much, due to an increased supply and decreased demand for the country’s currency

Aggregate demand may shift too far to the right, causing inflation

The country’s ability to repay their international debt may decrease, leading international investors to withdraw their funds

The overall level of investment can decrease, leading to a recession

Question

20-12-2022
Business

Answered

Which of the following is not a possible consequence of chronic large budget deficits?
The exchange rate might appreciate too much, due to an increased supply and decreased demand for the country’s currency

Aggregate demand may shift too far to the right, causing inflation

The country’s ability to repay their international debt may decrease, leading international investors to withdraw their funds

The overall level of investment can decrease, leading to a recession

Answer :

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arenasaleem890 arenasaleem890 · Answer 1 · 2022-12-24T05:04:05-05:00

The correct answer is The country’s ability to repay their international debt may decrease, leading international investors to withdraw their funds.

A country that has a significant current account deficit always runs the danger of its currency losing value. The currency rate will decrease to reflect the imbalance of foreign capital flows if there aren't enough inflows to cover the shortfall. It is commonly accepted that large budget deficits are likely to lead to higher interest rates, an excessive expansion of the money supply, and higher prices. Therefore, it is possible that budget deficits will indirectly influence the exchange rate. The value of one currency will increase as the exchange rate changes, while the value of the other currency will decrease. A currency is considered to have appreciated when its value rises.

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