How does exp. fiscal policy cause currency depreciation under the Mundell-Fleming model? The book cites additional economic activity causes increase in net imports, so current account deteriorates and leads to currency depreciation - as well as a brief mention of inflation (though the Mundell-Fleming model is supposed to assume inflation plays no role in FX rates). My thinking is that why does net imports have to increase? This “goods flow effect” is what causes exp. fiscal policy in itself to have an FX depreciation effect in low capital mobility scenarios and FX uncertain effect in high capital mobility scenarios
The assumption is that as money in circulation increases (higher government spending, lower taxes), aggregate demand increases: people will buy more stuff in general, so there will be more imports. There is no mechanism that should change exports (i.e., trading partners aren’t assumed to have increased aggregate demand), so imports increase, exports remain stable, current account shrinks.