Long-Run Effects of Expansionary Monetary Policy
Expansionary monetary policy can lead to lower domestic interest rates. How might these lower rates affect the value of the domestic currency and, through their influence on net exports and capital formation, the economy’s long-run PPC?
The changes in interest rates only affect financial markets in the short run, resulting in movement along the PPC with no long-run shift.
Lower interest rates depress both net exports and capital formation, leading to an inward shift of the PPC.
Lower interest rates can depreciate the domestic currency, boosting exports and encouraging domestic capital investment, which shifts the PPC outward over time.
They lead to an appreciation of the currency that offsets any benefits from increased investment, leaving the PPC unchanged.
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