Assume that the government is unable to change the amount of public debt that the private sector
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Question:
Assume that the government is unable to change the amount of public debt that the private sector holds. Consider both fixed and flexible exchange rate regimes. Explain how would the nominal and real exchange rate, the price level, and the quantity of nominal and real money balances respond to:
a. An open-market operation aiming to increase the supply of money.
b. An increase in the government deficit.
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