Statement 1: “Due to its stimulative nature, the expansionary monetary policy would increase imports and decrease exports. This change is measured by the current account and the current account would move towards a deficit.” The chart on page 86, Book 2 Schweser confirms that expansionary monetary policy moves the current account toward deficit and page 85 says “The higher income and higher domestic prices stimulate imports and discourage exports” which will create an current account deficit, but the answer in the back of the book says that this is wrong. What gives?
Correction 1PM Q76 The solution states that an expansionary money supply shifts the current account to surplus via a depreciating currency. If you take a long run view, this would be true i.e. exchange rates move to keep imports and exports competitive which is the whole point of a floating system. However on page 85 book 2 Economic Schweser states “Expansionary monetary policy reduces a current account surplus or increases a deficit” The fact that currency then depreciates is the correcting mechanism. Posted: 2009-06-01