An expansionary monetary policy can lead to lower interest rates, a depreciating currency, and a current account deficit.

Question

Quizplus · Accepted Answer

Expansionary monetary policy, which involves lowering interest rates to stimulate economic activity, can lead to a depreciating currency because lower interest rates make a country's assets less attractive to foreign investors. This depreciation can worsen the current account balance by making imports more expensive and exports cheaper, potentially leading to a deficit if the increase in import costs outweighs the benefits of increased exports.

An Expansionary Monetary Policy Can Lead to Lower Interest Rates