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Can lower government deficit cause the dollar to drop

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Some economists have argued that a lower government deficit could cause the dollar to drop by reducing high real interest rates in the United States. What does the asset view of exchange rates predict will happen if the United States lowers its budget deficit? What is the evidence from countries such as Mexico and Brazil?

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The impact of a reduction in the budget deficit on the value of the dollar depends on how that deficit reduction is accomplished. The key according to the asset market model is whether the mechanism used leads to a healthier or weaker ...

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