MAcro19 - Chapter 19 Exchange Rates and the Macroeconomy...

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Chapter 19: Exchange Rates and the Macroeconomy Open economy: one that trades with other nations in goods and services, and perhaps also trades in financial assets International Trade, Exchange Rates, and AD Booms or recessions in one country tend to be transmitted to other countries through international trade in goods an services One determinant of NX is a rise in foreign incomes. Another is: o Relative Prices, Exports, and Imports A fall in the relative prices of a country’s exports tends to increase that ocuntry’s net exports and hence to raise its real GDP. Analogously, a rise in the relative prices of a country’s exports will decrease that county’s net exports and GDP. Price increases for foreign products raise a country’s NX and hence its GDP. Price decreases for foreign products have the opposite effects o The Effects of Changes in Exchange Rates Currency appreciations/depreciations change international relative prices A currency depreciation should raise NX and therefore increase AD. Conersely, a currency appreciation should reduce NX and therefore decrease AD. Depreciation AS In an Open Economy The US purchases some of its input from abroad (oil) When dollar drops, imports are more expensive When the dollar depreciates , the prices of imported inputs rise. The US AS curve therefore shifts inward , pushing up the prices of American-made goods and services. By exact analogous reasoning, an appreciation of the dollar makes imported inputs cheaper and shifts the U.S. AS curve outward , thus pushing American prices down. The CPI goes up even if no American prices rise bc of foreign prices rising.
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