Interest rate and NET export

[cding]

Lower interest rate increases or decreases NET export?

Book 2 page 130 says, lower real interest rates will make investment less attractive to foreigners, who will tend to move money out of the country, selling domestic currency and decreasing domestic currency/foreign currency exchange rates. This will make exports less expensive to foreign buyers and exports will increase.

Basically it says: lower interest rate => less foreign investment => domestic currency depreciate => (NET) export increase

Below is a question found in Shweser Qbank

An unanticipated shift to an expansionary monetary policy will NOT lead to:
A) an appreciating domestic currency
B) more rapid economic growth, an accelerated inflation rate, and lower real interest rates
C) more expensive domestic products, which reduces exports
D) reduced foreign investment

The answer is A) and I don't have problem with that. But let's look at answer C), though I noticed it says "exports" not "net exports", does that mean the currency depreciation effect is stronger than the negative price level effect, and eventually leads to a increase of net export?

 

[Dsylexic]

this is a wild assed guess:
>>> being 'unanticipated' , the expansion in money supply will not be reflected in price levels.?

i have a hunch that 'unanticipated' is the key word here..

 

[oagra]

An unanticipated shift to an expansionary monetary policy shifts the AD curve to the right increasing prices and demand in the short term and as the money supply is increased short term interest rates will decrease and hence domestic currency will depreciate.

So answer A is the only one that fits. Answer C is wrong as it will lead to more expensive domestic product and hence exports will decrease.



Edited 1 time(s). Last edit at Saturday, June 16, 2007 at 07:40AM by oagra.

 

[CFAZod]

The question asks, "which of the following will unanticipated monetary expansion NOT lead to"?:

We are questioning answer C: "more expensive domestic products, which reduces exports"

If we all agree that unanticipated monetary policy will cause inflation, then we can see that domestic prices will indeed be more expensive. Answer C does not state "from a foreign standpoint". Interestingly, it seems that from a foreign standpoint, the unanticipated monetary policy theories' statement that the increase in domestic prices will be more than offset by the reduction in the domestic currency price relative to the foreign currency. Hence the growth of hedge funds.

 

[JoeyDVivre]

Say what?