An unanticipated shift to an expansionary monetary policy will NOT lead to: A) more rapid economic growth, an accelerated inflation rate, and lower real interest rates. B) more expensive domestic products, which reduces exports. C) an appreciating domestic currency.
Unanticipated expansionary monetary policy will lead to both A) and B). So C) is the answer.
B If anything, expansionary monetary policy should lead to inflation, thus to comparatively cheaper products. As for C, my guess is that in the short term you can fuel your economy with an expansionary policy, so you produce and export more, so the others need more of your money to buy your products… something along these lines… So what is it?
Spot on cpk. I thought that B and C contradicted each other really - if the currency is depreciating, then surely you wouldn’t have a reduction in exports? The correct answer was C) an appreciating domestic currency. An unanticipated expansionary monetary policy will not lead to an appreciating domestic currency. Higher inflation will increase prices of domestic products and make them unattractive to foreigners. As a result, foreigners will reduce their demand for domestic products and will not demand the domestic currency as much as before. Coupled with declining foreign investment, which will also lead to reduced demand for the domestic currency, the domestic currency value will fall relative to other currencies.