Figure 20-6

-In Figure 20-6, an expansive monetary policy in a closed economy results in an equilibrium at point E.In our open economy, allowing for the induced change in the currency exchange rate, the final equilibrium will be at a point like

Question

Figure 20-6
 
-In Figure 20-6, an expansive monetary policy in a closed economy results in an equilibrium at point E.In our open economy, allowing for the induced change in the currency exchange rate, the final equilibrium will be at a point like

Quizplus · Accepted Answer

An expansive monetary policy in a closed economy leads to an increase in the money supply, which leads to a decrease in interest rates and an increase in investment. In an open economy, the increase in investment demand will lead to an increase in the demand for domestic currency to purchase domestic assets, causing the currency to appreciate. This appreciation will make exports less attractive and imports more attractive, reducing net exports. The final equilibrium will be at a point where the increase in investment is offset by the decrease in net exports, which is shown at point B.

Figure 20-6 -In Figure 20-6, an Expansive Monetary Policy in a Closed