The international impacts of a debt-financed tax cut, according to the traditional view of government debt, are a(n) ______ in net exports and a domestic currency _____.

Question

Quizplus · Accepted Answer

According to the traditional view of government debt, a debt-financed tax cut leads to an increase in the budget deficit and, consequently, an increase in the supply of government bonds. This increase in supply can lead to a decrease in demand for the domestic currency, which can cause the currency to depreciate. A weaker currency, in turn, can make exports cheaper and more competitive in international markets, boosting net exports. Therefore, the correct answer is D, decrease in net exports and a domestic currency appreciation.

The International Impacts of a Debt-Financed Tax Cut, According to the Traditional