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Author Question: Monetary expansion causes the current account balance to increase in the short run. Discuss. Is the ... (Read 87 times)

sc00by25

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on: Jun 30, 2018
Monetary expansion causes the current account balance to increase in the short run. Discuss. Is the same the case for fiscal expansion?
 
  What will be an ideal response?

Question 2

What is the best explanation for why China and India have received so much international interest and foreign investment?
 
  A) Their large populations
  B) Their geographic location
  C) Their control over natural resources
  D) Government incentives provided to foreign firms


Jordin Calloway

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Reply #1 on: Jun 30, 2018
Answer to Question 1

Am increase in the money supply leads to an increase in Y and E (output increases and the currency depreciates, respectively). Because of the currency depreciation, domestic goods are now cheaper compared to foreign goods. Exports increase and imports decrease, therefore the CAB increases.
An expansion of fiscal policy actually reduces the CAB: the DD curve is shifted right. Therefore Y rises, but E falls (output rises but the currency appreciates.) Domestic goods are more expensive, and the CAB falls.

Answer to Question 2

A


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