Economics (Reading 13) Question 3 + Expansionary/Restrictive Policies

CFA Level II Economics
#1

Hello,

First question : It talks about the effects of Expansionary / Restrictive Policies. Can someone make it clear why increased government spending leads to depreciation of the currency value? It’s because effectively the government spending goes up, the money supply “goes up”?

Second question : Q3 of practice question in the CFA curriculum; the answer is (1.0055 × 0.7218) × (1 + 0.022) × [1/(1.0006 × 0.7279)] –1 = 0.7258 × (1.022)(1/0.7283) –1 = 1.0184 – 1 = 1.84%.

This honestly makes zero sense to me. Why are we multiplying two currencies’ spot rates (because they are a pair?) and why multiply by EUR LIBOR? I can’t seem to logically understand this.

Thank you in advance.

#2

For the first question, an expansionary fiscal policy should lead to a currency appreciation, not depreciation, since you have upward pressure on the interest rate.

#3

Thanks for the response. I basically memorized that little table as to what happens to currency value in case of expansionary/fiscal situations, but not fully understanding why.

In a different thread, it was explained that restrictive fiscal policy (basically induces higher money supply), causes supply to go up, prices to go down, but interest rates still go down. I’m confused on this one too… would you know the answer?