Sauce p. 43 Schweser states that a RESTRICTIVE fiscal policy will increase budget surpluses. The reduced agg demand causes an economic slowdown and lower inflation. These factors discourage imports and encourance exports, resulting in currency appreciation. However, budget surpluses suggest that gov borrowing is down which reduced real rates which should lead to currecy depreciation. This effect dominates in the short-run. EXPANSIONARY fiscal policy will do the opposite - short-run appreciation and long-run depreciation. Now here is my question: On the next page they detail what happens to the current and financial accounts when you undergo a EXPANSIONARY fiscal policy. Here they say the currency appreciates. This is only the short run as detailed above. So if we are asked a question on this are we only interested in the short-run effects on the current and financial account? Sorry for the long post.
Oi shite, this stuff is still on the exam? Hahahaha, I’m so fooked for on Econ!
I would assume they are talking about short run if not mentioned specifically in the question. My reasoning is becuase it is very likely that these questions may be asked in the context of currency related questions (arb opps and parity etc.). If you are trying to forecast the currency movements due to fiscal policy shift, you would almost always be interested in the short run effects. My 2 cents at least
i always think of what changes in currency value when they change the policy in this case expansionary- more borrowing- higher rates - currency appreciation