Please refer to P331 of Book 1-schwesernotes. It says that a monetary expansion would leade to a deterioration of the financial account and capital account. I thought that they were meant to balance out. If the change in one is positive, shouldnt the change in the other be negative?
Two things happen: 1. Real interest rates get reduced 2. Domestic GDP will rise This explains it well: http://www.investopedia.com/study-guide/cfa-exam/level-1/global-economic-analysis/cfa15.asp Investors can buy and sell financial assets such as stocks and bonds more quickly than producers and consumers can sell and buy physical goods. So initially, interest rate (substitution) effects would be expected to dominate. An unanticipated increase in the money supply will cause the exchange rate to go down, the financial account to weaken and current account to gain strength. Over time, the income effect will come into play. A rising GDP will cause both the trade balance and financial account to weaken.