If a Government Increases Its Budget Deficit, Which Statement Would

question 125

Multiple Choice

If a government increases its budget deficit, which statement would best predict the effects?

• A) Interest rates rise, and the real exchange rate appreciates.
• B) Interest rates fall, and the real exchange rate depreciates.
• C) Interest rates rise, and the real exchange rate depreciates.
• D) Interest rates fall, and the real exchange rate appreciates.

---

Definitions:

Zero-Coupon Bonds

Bonds that do not pay interest during their lifetime and are instead issued at a discount to their face value, which is paid at maturity.

Yield

The income return on an investment, such as the interest or dividends received, often expressed as an annual percentage based on the investment's cost, its current market value, or its face value.

Yield To Maturity

The total return expected on a bond if held until it matures, accounting for its current price, face value, interest payments, and time to maturity.

Zero-Coupon Bond

A bond that does not pay periodic interest and is sold at a deep discount from its face value.