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282CHAPTER 9. THE NEW INTERNATIONAL MACROECONOMICS(175)⇒and (9.48) it follows that domestic output unambiguously increases followinga the domestic monetary expansion. The monetary shock raiseshome consumption. Part of the new spending falls on home goods whichraises home output. The other part of the new consumption is spent onforeign goods but because ˆp ∗ t (z ∗ ) = 0, the increased demand for foreigngoods generates a real appreciation for the foreign country and leads toan expenditure switching effect away from foreign goods. As a result,it is possible (but unlikely for reasonable parameter values as shown inthe end-of-chapter problems) for foreign output to fall. Since the realinterest rate falls in the foreign country, foreign consumption followingthe shock behaves identically to home country consumption. Currentperiod foreign consumption must lie above foreign output. Foreignersgo into debt to Þnance the excess consumption and run a current accountdeÞcit. There is a steady-state transfer of wealth to the homecountry. To service the debt, foreign agents work harder and consumeless in the new steady state. To determine whether the monetary expansionis on balance, a good thing or a bad thing, we will perform awelfare analysis of the shock.Welfare Analysis(176)⇒(177)⇒We will drop the notational dependence on z and z ∗ . Beginning withthe domestic household, break lifetime utility into the three componentsarising from consumption, leisure, and real cash balances, U t = Ut c +U y t + Utm ,whereU c t =∞Xj=0U y t = − ρ 2U m t =γ1 − ²β j ln(C t+j ), (9.95)∞Xj=0∞Xβ j y 2 t+j , (9.96)j=0β j ÃMt+jP t+j! 1−². (9.97)It is easy to see that the surprise monetary expansion raises Utm so weneed only concentrate on Ut c and Ut y .Before the shock, Ut−1 c =ln(C 0 )+(β/(1 − β)) ln(C 0 ). After theshock, Utc =ln(C t )+(β/(1 − β)) ln(C). The change in utility due to