Government borrowing to fund current spending tends to cause _________ to rise. Subsequently, the local currency will _________ causing the trade deficit to rise.
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Government borrowing creates demand for loanable funds, and therefore increases the price of such funds, i.e. the interest rate. When interest rates rise versus foreign rates, the value of the local currency rises on the foreign exchange market. This causes imports to be less expensive locally and exports to be more expensive abroad, and therefore tends to cause the current account trade deficit to widen.