Question

“when the government spends more than it collects in tax revenues. it must sell bonds to finance its excess expenditures. But selling new government bonds drives interest rates down and thus stimulates the economy by encouraging more investment and decreasing the foreign exchange rate, which helps our export industries.” Do you agree or not; and why?

Answer 1

No, this is just the opposite mentioned here,

By selling the bonds in the market, the government will absorb excess liquidity in the market, this will reduce the savings and money supply and that will drive the interest rate higher, at a higher interest rate more foreign funds will come to the nation so that they can benefit from a higher interest rate, this will appreciate the local currency and that will also reduce the exports in the market. overall the multiplier of the government expenditure will be very less.