the effects of a monetary expansion balance, account, positive, change, capital

mdfb79

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, the change in the other should be negative?

senlinlang

I think you mean current account and not capital acct (aka financial account)

I think the balance of payment and currency effects are not done as clearly as say the 2008 version. It seems to stop halfway through.

Expansion in monetary policy leads to higher income -> accelerated inflation rate -> lowers real interest rate.

I] Lowering real interest rate would decrease foreign investments thereby creating a financial account deficit.
The higher income and accelerated inflation rate makes 1) ppl richer -> ppl afford imported goods --> import increase 2) accelerated inflation leads to domestic goods more expensive -> decrease in export. These leads to a current account deficit.

And this is where it stops for CFA and Schweser 2010.

II] However, b/c of the expansionary monetary expansion leading to a DC depreciation ( 1) lower real interest rates decreases the domestic investment -> decreases DC 2) decrease in export --> also decreases demand for DC).
And b/c DC depreciated, domestic goods is relatively cheaper and therefore export increases. This offsets the current account deficit to surplus.

Now the second part was from 2008 Schweser, so.... I'm not sure if you should just stop at where 2010's version takes you or go one step further...