It mutes both the MIDI source and the new Audio track (this happens both when there is and when there isn’t a valid Audio content in the resulting audio file).
[Edit] Cubase also doesn’t always clean up removed audio tracks even if I remove them using the Pool - Remove unused Audio files. Yes, this part of the software definitely needs some love.
Audio tracks and audio files on the pool are not tied. Files can reside on multiple tracks and takes, and tracks can have multiple audio files, so deleting a track does not always free the audio file.