Any secret how to remember rates and policies interdependence?

CFA Level II
#1

what happens to rates and currency when there are restrictive/expansionary fiscal/monetary policies?

i have a list of what happens during which combination, but it is difficult to memorize.

any secrets you can teach?

#2
  • High Capital Mobility (Same for both = Ambiguous), (Differs for each = technically same, Expansionary FP = /\ cur which is same as Restrictive MP, Restrictive FP = / cur which is same as Expansionary MP)
  • Low Capital Mobility (Same for both MP/FP = Same effect), (Diff for 1 or the other = Ambiguous)
#3

(1) For low capital mobility -> think imports

(2) For high capital mobility -> think monetary policy and money flow

For low capital mobility, an expansionary monetary and fiscal will boost incomes, increase imports, and cause depreciation

For high capital mobility, an expansionary monetary and restrictive fiscal (magnifying monetary effects) will add money to the country, allowing them to easily flow out, causing depreciation

#4

I saw this from another thread. I write the different combinationa as they are in the book with 4 columns

1st column for monetary: eerr

2nd column for fiscal: erer

3rd column for open economy: udau

4th column for closed ecomy duua

when you write it all down it kind of sticks in your hear a bit like a song.

#5

Make the 4*4 table for each of them and that will be easier to remember.

#6

you are a w e s o m e

#7

If you want to understand the relationships, try to remember the following:

High capital mobility : focus on interest rate. High interest rate -> people want to invest in the country -> currency appreciates. When is interest rate high? --> When 1. government borrows to finance expansionary fiscal policy and 2. central bank makes borrowing expensive with restrictive monetary policy. Low interest rates the other way around.

Low capital mobility : focus on aggregate demand. Expansionary fiscal/monetary policy boosts aggregate demand -> more imports to the country, so currency depreciates. Restrictive fiscal/monetary policy lowers aggregate demand -> more exports out of the country, currency appreciates (foreign countries buy the currency to purchase the goods).