If a government initially has a balanced budget but then cuts taxes temporarily, it is running a deficit that it must somehow finance. Suppose people think the government will finance its deficit in the future 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? Would you still expect the tax cut to cause an increase in output in the short run? Use AA-DD model to answer this question.
This question was answered on: May 23, 2022
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