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Yep, that would be possible. Though note that it won't be as easily to set up on your host machine as a "normal" monitor. But in general, yes, you would be able to toggle between the modes.
That said, you'll need to jailbreak your device, install USB networking and launchpad. Either of these steps will need a bit of reading up on it, but I guess you'll manage it.
Depending on what OS you use on your desktop machine, you could go for exporting the current screen or - if Linux is your host OS - run a second desktop on the Kindle.
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