Question

This assignment requires the application of your understanding of how the federal budget deficit affects economic variables.

Please explain the impact of a federal budget deficit on interest rates and the trade balance.

Answer 1

The  impact of a federal budget deficit on interest rates and the trade balance is that it can bring about the  inflow of foreign financial capital as well as a better exchange rate.

How can budget deficit have effect on trade balance?

When there is a stronger exchange rate there will be a little bit difficult for all the  exporters that want to sell their goods to foreign countries,  and at this time the imports will become cheaper.

In this case, trade deficit  will definitely bring about  an inflow of foreign financial capital as well as a good exchange rate.

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