Monetary Policy Implications of an Unanticipated Shift - CFA Level 1 Exam

Impact of an Unanticipated Shift to a More Expansionary Monetary Policy

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Question

An unanticipated shift to a more expansionary monetary policy will most likely cause

Answers

A. depreciation in the exchange rate of the nation's currency, higher real interest rates and an inflow of capital.

B. appreciation in the exchange rate of the nation's currency, higher real interest rates and an inflow of capital.

C. appreciation in the exchange rate of the nation's currency, lower real interest rates and an outflow of capital.

D. depreciation in the exchange rate of the nation's currency, lower real interest rates and an outflow of capital.

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Explanations

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A. B. C. D.

An unanticipated expansionary monetary policy will increase economic growth, accelerate in the inflation rate and lower real interest rates. These factors lead to an decrease in the demand for the nation's exports and assets and consequently a decrease in the demand for the nation's currency. This serves to cause the currency to depreciate. Lower real interest rates cause a capital outflow because investors liquidate their assets in search of a higher yield abroad.

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