I am looking at the quicksheet and it says that an unanticipated expansion of monetary policy leads to currency depreciation where as an unanticipated expansion of fiscal policy will lead to the opposite. I thought both would lead to the same thing, since we will have more money in the system to to speak when either policy expands… Can anyone provide an explanation? Thanks!
interesting, quicksheet and secret sauce says different things in terms of currency value and current account deficient/surplus…
unanticipated expansion of monetary policy leads to currency depreciation - this makes sense because will likely reduce interest rates to make the money supply accessible. Low rates makes the currency less attractive so investors will sell the currency and take it to other countries with higher rates. unanticipated expansion of fiscal policy leads to appreciation - it must mean the gov will buy up everything to increase demand, leading to an appreciation of the currency from the currency being bought up, at least short term. Can somebody check this logic?
Nep-hi and quicksheet both are correct. Fiscal - currency appr (domestic) Mon - Dep (domestic)
plus an expansionary monetary policy will increase the demand for imports, which increases the foreign currency relative to domestic. Increasing the money supply increases inflation which also devalues domestic currency expansionary fiscal policy will increase real rates which increases demand for domestic currency relative to foreign.
i was thinking expansion of fiscal policy means people have more money thus interest rate will decrease, thus depreciation of domestic currency… increased money supply from fiscal policy will increase imports and further depreciate domestic currency… both expansion policies ultimately increases money supply (one thru spending and one thru lowering taxes), no? McGrey, how do the fiscal policy increase real rates? this is the connection i m missing…
MrGrey Wrote: ------------------------------------------------------- > plus an expansionary monetary policy will increase > the demand for imports, which increases the > foreign currency relative to domestic. Increasing > the money supply increases inflation which also > devalues domestic currency > > expansionary fiscal policy will increase real > rates which increases demand for domestic currency > relative to foreign. Bing bing …tell the fabolous genteman what hes won please…yes Mr greys explanation is good
OOoo it increases real rates because aftertax return will be lower… cool i get it… (hope thats right) Thanks!
How will the Current Account shift under expansionary monetary policy Argument 1: Currency depreciates making exports cheaper for foreigners >>> CA Surplus Argument 2: Policy stimulates domestic consumption, boosting imports >>> CA Deficit I have seen variations of both these points in Schweser, its probably a case of SR vs LR, but I’d be glad if one of the resident gurus could clarify 
Just focus on the fact that in the LR monetary policy is not a BOP/exchange rate control mechanism and so any SR effects have to be reversed in the LR, so (in the SR) Currency depreciates we export more and import less causing a CA surplus, (in the LR) as this continues the economy grows and prospers and so our currency appreciates exports decrease, imports increase and we go back to CA deficit. This is just how I think about it, hope it helps.