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The country in question adopts a flexible exchange rate. If a government initially has a balanced budget but then decides to cut taxes temporarily, it
The country in question adopts a flexible exchange rate. If a government initially has a balanced budget but then decides to cut taxes temporarily, it is running a deficit that it must somehow finance. Suppose people think the government will finance its deficit by printing the extra money it now needs to cover its expenditures. Would you still expect the tax cut to cause a currency appreciation in the short run? Explain and use the DD-AA model to support your answer
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