[10keyLeah]

I was hoping someone could explain this Wiley MCQ.

It asks what effect an expansionary policy will have on net exports?

A. Fiscal Negative

B. Fiscal None

C. Monetary Negative

D. Monetary None

The answer is A. What I don’t understand is why a expansionary Fiscal policy would have a Negative effect on net exports, and yet a Monetary policy would have a Positive effect on net exports? The answer for C. says expansionary monetary policy would be positive?

Can anyone explain this?

Ninja Combo, Yaeger, Wiley -- Licensed CPA, May 2015

[Whopper Warrior]

Expansionary Monetary = increase $ available, decrease $ value, increase exports (imports more expensive, exports cheaper)

Expansionary Fiscal- increases spending, increases interest rate, increase foreign investment, increases $ value, decreases ability to export because of $ increased value.

Both policies are a house of cards, because the economy will correct itself overtime to LRAS. Both policies are ineffective

Edit: Even easier think of it from your shoes:

Reduced Taxes: You have more money, you spend more money. Foreign Firms want your money, they send more goods over for your money, increase imports.

Monetary: Your bank account doubles, prices triple, you are not richer, you just have more money. Foreign Firms do not like that you can not spend money, they stop sending goods over decreasing imports.

Both methods are short term in nature, eventually they will both reverse.

ALL 4 parts passed summer 13
Ethics October 13
Experience (waiting)

Becker Only

[10keyLeah]

@whopper warrior – thank you!

Edit: So increased interest rates means other countries want to invest in the country with increased rates. They will need to change their $ to the country with rising interest rates $. That increases demand for the $ and therefore increases the value.

Ninja Combo, Yaeger, Wiley -- Licensed CPA, May 2015

[Author]

Replies