The short run sequence of events following an unanticipated shift to a more expansionary monetary policy would be lower interest rates followed by dollar
A) depreciation, and an increase in the current account deficit.
B) depreciation, and a decrease in the current account deficit.
C) appreciation, and an increase in the current account deficit.
D) appreciation, and a decrease in the current account deficit.

Question

Quizplus · Accepted Answer

When there is an unanticipated shift to a more expansionary monetary policy, it leads to a decrease in interest rates. This leads to a decrease in the demand for the domestic currency, causing it to depreciate. A depreciated currency makes exports cheaper and imports expensive, leading to an increase in the current account deficit. Therefore, the correct answer is B, depreciation, and a decrease in the current account deficit.

The Short Run Sequence of Events Following an Unanticipated Shift