Question

The impact of monetary policy on the current account is ambiguous because

Select one:

A. the income effect of monetary policy on the current account is offset by the exchange rate effect.

B. monetary policy only affects real exchange rates.

C. exchange rates are unresponsive to changes in the money supply.

D. only fiscal policy results in expenditure switches.

Answer 1

Ans. Option a

Suppose there is monetary expansion, it will lead to fall in interest rate which will increase net capital outflow causing tge currency to depriciate. This will makes exports cheaper but imports expensive, increasing net exports. But decrease in interest rate also leads to increase in income due to increase in aggregate demand. So, because of increase in income demand for imports increases. Therefore, the affect on current acount (or net exports) is ambiguous.

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