Course 2 macro question

[retaker]

CSM, Section Watchel III, #E7

State the impact of an increae in the US dollar money supply on foreign exchange rates and net exports.

I see why the dollar would fall, but wouldn't the increase in money supply also increase the demand for imports, which would decrease net exports?

[retaker]

PS They say the dollar depreciates and hence exports increase, so that net exports increase.

[shluffer]

I see why the dollar would fall, but wouldn't the increase in money supply also increase the demand for imports, which would decrease net exports?

Is it an old exam q? you might want to check and make sure that csm has the correct answer. I think if the dollar depretiated, net imports should increase.

[Macroman]

I see why the dollar would fall, but wouldn't the increase in money supply also increase the demand for imports, which would decrease net exports?

Is it an old exam q? you might want to check and make sure that csm has the correct answer. I think if the dollar depretiated, net imports should increase.

If the dollar depreciates, the imports will be more expensive (they are produced in an economy where the money did not depreciate) hence demand for imports should fall while demand for exports (which are now "cheap") will rise. This has not always been observed in practice, but it is the right answer for the exam.

Incidently this is not really a macro question.

[retaker]

It's not a Macro question?

Yes, It is 1991 Course 5, #31 worth 2 pts.

Okay, I agree about the increase in net exports due to increase in exports due to the depreciation of the dollar,
but what about the direct effect of the money supply increase on imports? CSM has another later problem in this section, E13 - Fall 1997 Course 5A #2 worth 1 pt, where they state that the increase in money supply causes imports to increase. So it seems you have a decrease in net exports due to the increase in money supply and an increase due to the depreciation of the dollar.

In Problem E8) 1991 Course 220 - They have that the effect of an increase in the interest rates on the exchange rate is larger than the effect of an increased trade deficit.

For E7 could an analogous type of thing be happening? The increase in exports due to the depreciation is always greater than the decrease due to the increase in money supply. :-?

[Macroman]

I don't have my copy of Landburg handy, but I'm confident that it contains the essentials to answer this question.

The "macro" portion of the problem would be undrstanding the simple quantity theory (ie more money means higher prices and lower currency values). It's true that depending on the the economic situation that the expansion of the money supply could lead to other kinds of economic expansion and indirect effects. You always want to look at the direct effects first and foremost, especially if they are not giving you numbers to work with.

I don't have (or want) CSM. It sounds like they are not entirely clear on this point.

[Dr T Non-Fan]

I recommend reading the Wachtel study note for a clearer picture.
I'm trying to type that with a straight face, as I recall it being less than clear.

[retaker]

Thanks guys. It probably won't matter anyway, because now that I have actually put some time into Macro, they probably won't ask any! :shake2: