Econ question following, question, currency, economic, growth

dmrktrading

Explain the differences of expansionary/restrictive fiscal and monetary policies.

Address the affects on the following: currency, economic growth and inflation, taxes, and borrowing.

stalkey

Just read the book, Mr. Young. Help me say hello to John Edwards.

hassan

Eh? I'm a little clueless here.

scarecrow

I'm a bit confused on this as the book, the Reading and schweser don't really explain well.

Assuming all changes are unanticipated and all short term.

Expansionary fiscal monetary policy:
I. Rapid Econ G (stimulates imports)
II. Accelerated Inflation Rate (domestic products more expensive, decr exports)
III. Lower Real interest rates (Reduces Foreign and Domestic Investment at home)
All 3 leads to a depreciation of DC

Effect (I) and (II) increases imports, decreases exports leading to a lower Current Acct (lets assume it lowered it to a deficit)

Effect (III) leads to a financial account deficit

And this is where the book stops with: DC depr; Fin Acct deficit; Current Acct deficit

But, doesn't a depreciation of DC leads to domestic goods cheaper thereby increasing exports? So my question is does a Expansionary fiscal monetary policy end up with a current account surplus or deficit?


Expansionary Fiscal Policy
I. Budget deficit --> Increases Aggregate Demand --> Causes economic growth and higher inflation
II. Increase in aggregate demand encourages imports (decr in exports) this leads to depreciation in DC (and Current Account Surplus)
III. But b/c gov't borrowing increased, this leads to increase real interest rates (due to crowding out effect), foreign and domestic investments increases at home (financial account surplus) and DC appreciates.

Expansionary Fiscal Policy: DC appreciates, C/A deficit, F/A surplus