Expansionary Monetary Policy

CFA Level II
#1

For some reason, I never get the right multiple choice when it comes to expansionary fiscal policy, can someone please try and explain it to me, Thx

#2

expansionary fiscal policy, isn’t that level I? Post a question and I’ll slam dunk it.

#3

I would think in this way. Fiscal policy means (remember FISCAL budget). Spending more by and that is what currently what US is doing. Expanding Monetary policy is to reduce interest rates

#4

just know its the opposite of expan monetary

#5

Remember with each an expansionary/monetary policy expansion, there are 2 primary effects: real interest rate effects and price effects. An expansionary monetary policy will cause interest rates to decrease, cause the financial account to decline, which causes the currency to depreciate, which will be offset by greater exports. The overall effect is an economic stimulus. This is the real interest rate effect. An expansionary monetary policy will cause domestic prices to increase, increase the demand for imports which decreases the current account, which causes the currency to depreciate, which is offset by an increase in the financial account which brings temporarily depressed interest rates back to equilibrium. This is the price effect. An expansionary fiscal policy will cause real interest rates to rise, attract foreign capital, which causes the currency to appreciate. The appreciating currency will cause exports to decline, which depresses the economy. This is the real interest rate effect. An expansionary monetary policy puts upward pressure on domestic prices, which decreases the current account, which causes the currency to depreciate. As a result, the financial account increases as a result of more foreigners owning the local currency. This is the price effect.

#6

Thx this is better, but still not 100 % sure i get it

#7

OK now I am thinking Expansionary Monetary Policy has 2 effects 1- Price effect : The increase in the growth rate of money supply will increase domestic growth and thus the need for imports, This will decrease the current account, and decrease demand for the domestic currency. 2- Interest Rate effect: it will also decrease the domestic interest rates and thus the demand for financial assets = decrease of financial account and depreciation of domestic currency.