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Economics Reading 13

Why does expansionary monetary policy put a downward pressure on the exchange rate?

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If you print money, your money’s worth less.

If you lower the interest rate your money can earn, your money’s worth less.

Simplify the complicated side; don't complify the simplicated side.

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Another way to think about it is in terms of uncovered interest parity.

Expansionary monetary policy = lower interest rates.

When you lower interest rates, your currency is less attractive than other currencies (you can invest in other countries in their local currencies and get a higher return). Demand for foreign currencies rise as a result, and as a result, your currency depreciates.