Explain the differences of expansionary/restrictive fiscal and monetary policies. Address the affects on the following: currency, economic growth and inflation, taxes, and borrowing.
Just read the book, Mr. Young. Help me say hello to John Edwards.
Eh? I’m a little clueless here.
I’m a bit confused on this as the book, the Reading and schweser don’t really explain well. Assuming all changes are unanticipated and all short term. Expansionary fiscal monetary policy: I. Rapid Econ G (stimulates imports) II. Accelerated Inflation Rate (domestic products more expensive, decr exports) III. Lower Real interest rates (Reduces Foreign and Domestic Investment at home) All 3 leads to a depreciation of DC Effect (I) and (II) increases imports, decreases exports leading to a lower Current Acct (lets assume it lowered it to a deficit) Effect (III) leads to a financial account deficit And this is where the book stops with: DC depr; Fin Acct deficit; Current Acct deficit But, doesn’t a depreciation of DC leads to domestic goods cheaper thereby increasing exports? So my question is does a Expansionary fiscal monetary policy end up with a current account surplus or deficit? Expansionary Fiscal Policy I. Budget deficit --> Increases Aggregate Demand --> Causes economic growth and higher inflation II. Increase in aggregate demand encourages imports (decr in exports) this leads to depreciation in DC (and Current Account Surplus) III. But b/c gov’t borrowing increased, this leads to increase real interest rates (due to crowding out effect), foreign and domestic investments increases at home (financial account surplus) and DC appreciates. Expansionary Fiscal Policy: DC appreciates, C/A deficit, F/A surplus