Explain the multi-market dynamics of a monetary expansion taking into account floating exchange rates......?

Question

QuestionForeign Exchange Markets, etc.

Explain the multi-market dynamics of a monetary expansion taking into account floating exchange rates. For instance, suppose a rise in the money supply impacts the domestic money market by lowering interest rates:

>>>>In what ways would the resulting change in domestic interest rates influence the foreign exchange markets and currency exchange rates?

>>>Would incomes likely rise or fall in such an open economy? Please explain some reasons why?

Answer 1

Generally, when a central bank undertakes a monetary expansion, it increases the supply of domestic currency and brings down the interest rate, both of which usually act to lower the value of the domestic currency compared to foreign currencies.

As to whether incomes would rise or fall, incomes would rise among exporters and those who compete with imports, but fall among those who are import-dependent. Overall, incomes would rise if the country in question has a large trade surplus and fall if the country in question has a large trade deficit. If the trade surplus/deficit is relatively small compared to GDP, economy-wide effects would be negligible.