Q. Tax cut under fixed as well as flexible exchange rates
1) What is the impact of a tax cut in an economy operating under a flexible exchange rate regime on household spending, interest rates, investment spending, the current as well as capital accounts as well as the exchange rate. How will the central bank respond if it is targeting inflation? Will the central bank response offset or reinforce the impacts of the tax cut?
2) What is the impact of a tax cut in an economy operating under a fixed exchange rate regime on household spending, interest rates, investment spending, the current as well as capital accounts as well as the exchange rate. How will the central bank respond in order to maintain the fixed exchange rate? Will the central bank response offset or reinforce the impacts of the tax cut?