If the government finances an increase in government purchases with an increase in taxes,which of the following would you not expect to see?

Question

Quizplus · Accepted Answer

An increase in taxes would lead to a decrease in disposable income, which would decrease consumption spending and ultimately, decrease aggregate demand. This would lead to a decrease in the interest rate as a result of the decrease in aggregate demand. However, an increase in taxes would not directly affect the exchange rate, as that is influenced by other factors such as interest rates and trade balances. Additionally, an increase in taxes would decrease net exports, as it would decrease consumption spending, reducing demand for exports. Therefore, it is expected to see a decrease in net exports.

If the Government Finances an Increase in Government Purchases with an Increase