Let me cite:
“Expansionary monetary policy will increase domestic economic growth (greater demand for imports) and will increase inflation (less demand for exports).”
I do not understand the logic behind the latter part of the sentence.
Why does higher inflation makes less demand for exports?
In fact I thought that expansionary monetary policy drives real interest rates lower, so it depreciates currency, so it makes export demand HIGHER, as currency is cheaper.
Think of it in terms of first order and second order effects. Expansionary monetary policy initially causes higher economic growth, higher inflation, and lower interest rates. All three factors lead to depreciation of the currency. Higher inflation makes domestically produced goods more and more expensive (even for foreigners) and therefore there is less demand for this country’s exports in the foreign market.
The fact that a depreciated currency because of lower interest rates stimulates exports is a second order effect. Ignore going this far out in time for purposes of the exam.
Anyone can chip in?
I remember somewhere saying that either expansionary fiscal or monetary has 2 opposite effects; one on current account, the other on capital account.
The reading then says that capital account has more effect due to its mobility over current account.