Co-movement between budget and current account deficit

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Because of the close co-movement between the budget deficit and the current account deficit, the two are often referred to as “twin deficits”. Explain in detail how an increase in the budget deficit that is due to an increase in government spending (not matched with an increase in taxes) will generate a current account deficit. Clearly explain the role of the interest rate and the exchange rate for the link between the budget deficit and the current account deficit. B) Describe the various factors that investors take into account when operating in the context of an open economy and discuss, in detail, how each of these factors affects their decisions to invest domestically or abroad. Give examples to illustrate your answers.

Reference no: EM13995854

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