Under floating exchange rates and high capital mobility, an expansionary monetary policy would help a country resolve a recession and a current account deficit.

Question

Quizplus · Accepted Answer

An expansionary monetary policy can lead to a decrease in interest rates, which can cause an increase in investment and consumption spending, leading to an increase in aggregate demand and output. This increase in output can then lead to a decrease in unemployment and a decrease in the current account deficit as imports decrease and exports increase. Under floating exchange rates and high capital mobility, the exchange rate would adjust accordingly to maintain equilibrium in the market, so the expansionary monetary policy would not lead to an increase in inflation or a decrease in the value of the currency.

Under Floating Exchange Rates and High Capital Mobility, an Expansionary