Explanation : An increase in government borrowing to finance an enlarged budget deficit will put upward pressure on real interest rates. This will retard private investment and aggregate demand. In an open economy, the higher interest rates will also increase the inflow of capital from abroad, which will cause the currency to appreciate and net exports to decline. Thus, the higher interest rates will trigger reductions in both private Investment and next exports which will weaken the expansionary impact of a budget deficit. ....Read more