When exchange rates are flexible, an expansionary monetary policy indirectly leads to a capital inflow and a current account surplus.

Question

Quizplus · Accepted Answer

An expansionary monetary policy typically leads to lower interest rates, which can decrease foreign investment in domestic assets (reducing capital inflow) and depreciate the domestic currency, making exports cheaper and imports more expensive. This could improve the current account balance but does not directly lead to a capital inflow and a current account surplus.

When Exchange Rates Are Flexible, an Expansionary Monetary Policy Indirectly