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Which of the following could be the long run effect of budget deficits? Lower interest rates...

Which of the following could be the long run effect of budget deficits?

Lower interest rates

Increased investment

Slower economic growth

Stronger domestic currency

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Answer #1

Correct option - stronger domestic currency.

As there is budget deficit. Which means government is spending more than revenue. And because of this increased spending, in the IS - LM curve model, IS curve will shift rightwards which will lead to increase in interest rate and output.

Due to higher interest rate foreign investors will try make profit and there will be huge capital inflow in the country and because of which demand for domestic currency will also increase and thus value of domestic currency will increase. And domestic currency will become stronger.

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