If the government finances an increase in government purchases with an increase in taxes,which of the following would you expect to see?
A)an increase in the exchange rate
B)a decrease in the interest rate
C)a decrease in aggregate demand
D)an increase in net exports

Question

Quizplus · Accepted Answer

Financing an increase in government purchases with an increase in taxes can lead to an increase in the exchange rate. This is because the government's demand for goods and services increases without a corresponding increase in the supply of money, which can lead to higher interest rates. Higher interest rates attract foreign capital, increasing the demand for the domestic currency and thus increasing the exchange rate.

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