I have come up with an algorithm to quickly predict currency movements in the above mentioned model. I have used the following conventions:
A positive (+) denotes high mobility, expansionary policy and appreciating currency.
A negative (-) denotes low mobility, contractionary policy and depreciating currency.
This is one of the cases that I would rather automate my answer than engage in active thinking to decide the chain of events, which is a big drain of stamina. This won’t take longer than a minute and you might as well relax a moment while your “hand answers the question for you”.
Contractionary M is denoted by “-M” column. What I mean is underneath that column the cells are labelled “+” to complete the table. Check the yellow cells in Step 3 and see their relationship with the column headers…
How come when both monetary and fiscal policy are expansionary, they are uncertain for high capital mobility? Wouldn’t monetary policy dominate in a high capital mobility environment (thus calling for devaluation in the currency)?
When monetary policy is expansionary while fiscal policy is restricitve (or vise versa) why we be uncertain in a low capital mobility environment? doesn’t fiscal policy always dominate in the low capital mobility environment?
I understand how expansionary fiscal policy causes depreciation of the domestic currency, but how does restrictive fiscal policy cause the domestic currency to appreciate?