Impact of an Expansionary Monetary Policy:
Money supply will increase.
LM curve shifts to the right.
Income level will increase.
r will fall.
... r < r*
... Investors will invest abroad
CF will rise; ER will fall; NX will increase.
Impact of monetary expansion:
Money supply increases
When r falls (r < r*)
CF rises from CF1 to CF2 (Fig. 17.8(b))
Investment abroad increases
When CF rises
ER depreciates from є1 to є2
NX rises from NX1 to NX2 (Fig. 17.8 (c))
(because of inverse relation between NX and ER)