Explain the differences of expansionary/restrictive fiscal and monetary policies.
Address the affects on the following: currency, economic growth and inflation, taxes, and borrowing.作者: stalkey 时间: 2011-7-11 19:38
Just read the book, Mr. Young. Help me say hello to John Edwards.作者: hassan 时间: 2011-7-11 19:38
Eh? I'm a little clueless here.作者: scarecrow 时间: 2011-7-11 19:38
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
