i dont want to annoy anybody, but the final effect on the domestic currency is what for 1) Expanssionary monetary policy:…(Money supply goes up, interest goes down…) 2) expansion of fiscal spending:… thank you!
Expansionary MP leads to depreciation due to excess supply and Expansionary FP leads to appreciation
I cannot for the life of me commit these and their effects on real rates, currency, and the BoP… I also can’t remember “traditional versus money model”, and all that garabage. Anybody know an easy way?
Ok when the Fed lowers the interest rate, it expands the money supply which leads to currency depreciation. There are two ways I remember this: 1) Expansion of money supply leads to inflation which depreciates a currency 2) If you picture a Supply/Demand graph, if supply shifts right and demand remains constant, price will decrease. Then I remember that expansionary fiscal policy has the opposite end effect on currency (but not necessarily opposite effects on interest rates, NX, etc)
* Expansionary monetary policy: - Money supply goes up, inflation goes up, real rates goes down, less attractive to foreign investor, demand for domestic currency down -> E.R depreciation, which leads to financial account deficit. - E.R depreciation -> imports up, exports down -> current.acc deficit Overall, BOP deficit * Expansionary fiscal policy: tax up, gov spending up: - imports up, exports down -> current.acc deficit - gov spending up, i.rate up, demand for domestic currency up -> E.R appreciates, more attractive to foreign investor -> fin.acc surplus Overall, BOP mixed Am I right?