How budget deficit might lead to appreciating currency

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Reference no: EM131006154

Some economists claim that a budget deficit often spawn an evil twin, a trade deficit.

A. Explain how a budget deficit might lead to an appreciating currency and a trade deficit. (Use the foreign exchange market diagram in this answer).

B. Explain how the introduction of the foreign sector makes the fiscal policy tool of the budget deficit less effective in stimulating the open, as compared to the closed economy. (Use the AD/AS model diagram in the answer)

C. According to economists, what is (are) the true cost(s) of a budget deficit. Does the "opening up" of an economy change the type of costs a deficit produces? (Use the investment/savings model to answer the question).

Reference no: EM131006154

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