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In the short run, if taxes rise, output will_and the exchange rate will increase; appreciate increase; depreciate decrease; a

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Ans) Decrease ; depreciate

An increase in taxes will give less money in hands of consumer and hence there will be less demand as a result output will decrease. Further Decrease in output lowers the transaction demand for real moneyholders, which inturn decreases the home interest rate. This will result in depreciation of domestic currency

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