Under a fixed exchange rate regime, we know that a tax increase will cause which of the following?
A) An increase in the exchange rate.
B) An increase in investment.
C) An increase in imports.
D) An increase in net exports.
E) An increase in the interest rate.

Question

Quizplus · Accepted Answer

Under a fixed exchange rate regime, a tax increase typically leads to a decrease in domestic consumption and an increase in savings. This can reduce imports and potentially increase net exports as domestic goods become relatively more attractive or necessary compared to foreign goods, due to the reduced domestic demand. Other options do not directly result from a tax increase in a fixed exchange rate system.

Under a Fixed Exchange Rate Regime, We Know That a Tax