CFA Practice Question

There are 341 practice questions for this study session.

CFA Practice Question

In a purely floating exchange-rate economy, a shift toward a more expansionary monetary policy will move the capital/financial account toward a ______. The current account will move toward a ______.
A. surplus; deficit
B. deficit; deficit
C. deficit; surplus
Explanation: An expansionary monetary policy will speed up economic growth, increase inflation and decrease real interest rates by increasing the money supply. This decrease in real rates will cause an outflow of funds into economies offering higher rates, causing the domestic currency to depreciate. The outflow of funds will move the capital/financial account toward a deficit (or a smaller surplus). The current account will move toward a surplus since the changes in current and capital/financial accounts in a purely floating economy must equal zero. Over a slightly longer run, the depreciation in the domestic currency will increase exports and decrease imports, moving the current account further toward a surplus. Therefore, always look at the effects on the capital/financial account first.

User Contributed Comments 5

User Comment
ohmms Think of a balloon. The more money (air) you put in it in an expansion, then more will leak out (of the country) due to the pressure, thus it will lead to a capital account deficit, which implies the opposite for the current account.
Kuki hmm...i'll remember that one for the exam ohmms..thanks!
Dinosaur dang i didnt know what the current account was. now i know and knowing is half the battle ... CFA
dblueroom don't feel bad I didn't know either. this is very likely to be on the exam - the BOP.
ElenaStep In the CFA curriculum it says that both of the effects will cause E to depreciate.
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