Suppose that government wants to reduce the public deficit, and therefore it increases taxes. At the same time, the central bank wants to strengthen the domestic currency and therefore it sells foreign reserves. What is the impact of this policy-mix on production and interest rate?

Question

Answer

Both, production and interest rate decrease

Answer

Both, production and interest rate increase

Answer

Interest rate increases, but a change of the production level is uncertain

Answer

Production decreases, but a change of interest rate is uncertain

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Suppose that government wants to reduce the public deficit, and therefore it inc...

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