Question

These questions refer to Purchasing Power Parity. Consider the relationship between expansionary monetary policy. the value...

These questions refer to Purchasing Power Parity.

Consider the relationship between expansionary monetary policy. the value of the dollar, and net imports.

How does this new dollar value impact net exports? (3 Points)

Do these two work with each other in regards to economic growth? Explain. (3 Points)

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Answer #1

Expansionary monetary policy, i.e. increase in money supply depreciates value of dollar. Because of this depreciation US people will have to pay more dollars to buy one unit of foreign currency and foreign good. Therefore, import will decrease and net import (export - import) will fall.

However, foreigners will find US good cheaper as they now have to pay less of their currency to buy one USD in order to buy US goods. It will increase US exports and net export (export - import) will increase.

By decreasing net import and increasing net export, the expansionary monetary policy helps US economy with economic growth as increase in net export increases AD (as AD = Consumption + investment + government spending + net export) and real GDP as well.

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