Schweser pg 86 Figure 2 says expansionary policy leads to current account deficit so a contractionary policy should do the opposite i.e. lead to a current surplus. So why does the answer to the following question seems to be backwards for the current account: Question An economy is in long-run equilibrium and the values of its imports and exports are equal. If the growth rate of the money supply is unexpectedly decreased, what are the most likely effects on real GDP and the country’s current account balance? Real GDP / Current account A) Increase / Suplus B) Decrease / Deficit C) Decrease / Surplus -------------------------------------------------------------------------------- Click for Answer and Explanation Real GDP is likely to decrease as higher real interest rates (resulting from slower money supply growth) reduce business investment and consumers’ purchases of durable goods. The current account initially moves into surplus as decreasing real GDP reduces domestic incomes and the demand for imports. However, higher real interest rates will cause the domestic currency to appreciate, making imports less expensive and exports more expensive. Thus imports are likely to increase while exports decrease, which should more than offset the initial effect and result in a current account deficit.
I think u need to organize ur different types of policies… expansive fiscal policy will lead to CA deficit expansive monetary policy will in the long run domestic good more attractive but short run deficit. Also some other theorys on international trade. so CA deficit short run. restrictive fiscal policy will lead to CA surplus restrictive monetary policy will actually lead to exports being cheaper since DC currency will be stronger but since they will get hit by a recession gdp goes down and less consumption so import less goods so CA surplus
Oh my gosh…I must have been brain dead by the end of full day of doing problems. Thanks for turning me around.