According to the traditional view (as in the Mundell-Fleming model), if taxes are cut without cutting government spending, then the short-run effects are a(n) of the dollar and a(n) in net exports.
A)appreciation; increase
B)appreciation; decrease
C)depreciation; increase
D)depreciation; decrease

Question

Quizplus · Accepted Answer

According to the traditional Mundell-Fleming model, if taxes are cut without cutting government spending, it leads to an increase in disposable income and therefore an increase in consumption. This results in a higher demand for imports, leading to an increase in net imports (exports decrease). At the same time, the increase in demand for domestic goods and services leads to an appreciation of the domestic currency. Therefore, the short-run effects are an appreciation of the dollar and a decrease in net exports.

According to the Traditional View (As in the Mundell-Fleming Model)