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Fixed Exchange Rates and Economic Policy

Fixed Exchange Rates and Economic Policy - worsens fiscal...

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Fixed Exchange Rates and Economic Policy monetary policy An expansionary monetary policy worsens the balance of payments. An increase in the money supply has three effects: 1. the real interest rate falls causing an outflow of capital, so the BOP worsens 2. real income rises, so imports go up and the BOP worsens 3. the price level rises causing imports to rise and exports to fall, so the BOP
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Unformatted text preview: worsens fiscal policy Expansionary fiscal policy worsens the balance of payments in the long run. A rise in government spending, for example, causes 1. Y to rise so imports go up, worsening the BOP 2. r to rise, leading to an inflow of money which improves the BOP, but only in the short run Fiscal policy is more effective than monetary policy when exchange rates are fixed....
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