Question

A country with a floating exchange rate faces a short-run recession and current account deficit. Policymakers want to use temporary expansionary monetary policy to increase both output and the current account balance. Will they be successful? Only with increasing output Only with increasing the current account balance No, not with either goal Yes, with both goals

Answer 1

With expansionary monetary policy, central bank reduces the interest rates leading to availability of borrowing at lower rates. This leads to increase in the demand for the products where producers starts manufacturing and selling more resulting in increase in the output.

But at the same time, with readily available cheap money in the economy/market, the purchasing power of people will increase leading to more imports from other countries resulting in further increase in the current account deficit.

Hence, they can do only increase in the output but not current account balance.

Option a is correct