Government fiscal policy and international trade seem to be linked. Let’s investigate their relationship.
A. Say a government is currently running a budget deficit and decides to cut taxes, increase spending, or both. Explain how this will affect interest rates in the country. (3 points)
B. Given the change in interest rates from part A, what will happen to the value of this country's currency? Explain why. (3 points)
C. Given the change in the value of the country's currency from part B, how will the price of the country's goods relative to other countries' goods change? What effect will this have on its current account?
D. What effect will all this have on the country's capital account, and how will this work to keep the balance of payments equal to zero?