An expansionary monetary policy lowers the real interest rate,causing the domestic currency to ________,thereby ________ net exports.

Question

Quizplus · Accepted Answer

An expansionary monetary policy involves an increase in money supply which leads to a decrease in the interest rate. A lower interest rate makes it cheaper to borrow, which encourages domestic investment and consumption, thereby increasing aggregate demand. The lower real interest rate also decreases the return on domestic assets, making them less attractive to foreign investors, which leads to a depreciation of the domestic currency. A weaker currency, in turn, makes exports cheaper and imports more expensive, thereby raising net exports. Therefore, the domestic currency depreciates, and net exports are raised.

An Expansionary Monetary Policy Lowers the Real Interest Rate,causing the Domestic