- CFA Exams
- CFA Level I Exam
- Topic 2. Economics
- Learning Module 3. Fiscal Policy
- Subject 4. Fiscal Policy Implementation
CFA Practice Question
The crowding-out effect implies that ______
A. a budget deficit will tend to bring a trade deficit.
B. an expansionary fiscal policy will tend to increase exports.
C. a budget deficit has no link to a trade deficit.
Explanation: Budget deficit and trade deficit tend to be linked: budget deficit -->higher interest rates --> inflow of foreign capital --> dollar appreciation --> decline in net export.
User Contributed Comments 3
| User | Comment |
|---|---|
| Leonie | Why decline in net export? |
| hoyleng | becuz dollar appreciates n becomes more expensive..US made goods become more expensive thus it reduce the export...... |
| 2014 | Because crowding out results in high real interest rates, which strengthens currency, strong currency reduces exports and thus leads to trade deficit |