For this question,assume that there is a simultaneous tax increase and monetary expansion.In a flexible exchange rate regime,we know with certainty that
A)the exchange rate and output would both increase.
B)the exchange rate would increase and output would decrease.
C)the exchange rate would decrease.
D)the exchange rate would decrease and output would increase.
E) none of the above

Question

Quizplus · Accepted Answer

A simultaneous tax increase and monetary expansion would lead to an increase in the supply of money and a decrease in the demand for money, leading to a decrease in interest rates. This decrease in interest rates would lead to a decrease in the exchange rate for a country with a flexible exchange rate regime. However, it is unclear what the effect on output would be, as it depends on various factors such as the initial level of output, the size of the tax increase, and the extent of the monetary expansion.

For This Question,assume That There Is a Simultaneous Tax Increase