Explain the net export effort in relation to an easy money policy. How does the net...
Explain the net export effort in relation to an easy money policy. How does the net export differ in an easy money policy compared to a fiscal policy designed to increase demand.
Homework Answers
Monetary expansion causes following:
- Fall in interest rate due to presence of money market.
- Deterioration of BOP due to capital outflows due to relatively higher world interest rate (refer point 1).
Net export effort helps in getting BOP on track and reduce its deficit.
Monetary contraction (ease) can also help raise interest rate and improve BOP(refer points 1 and 2).
How net export effort differs in following situations:
| Ease money policy | Fiscal expansion policy |
| Interest rises | Interest rises |
| BOP improves | BOP improves |
| Immediate | Takes time, lagged |
| Inflationary | Can be productive also |
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