EC 151 Ch 19 - EC 151 Ch 19 A Macroeconomic theory of open...

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Unformatted text preview: EC 151 Ch: 19 A Macroeconomic theory of open Economy S & D for Loanable funds and for foreign currency exchange Equilibrium in the open economy How policies and events affect an open economy Intro.: Develop a model that identifies key macroeconomic variables that describe economy's relationship with other economies and how these variables are related to one another. Two assumptions Goal: GDP is given P level is given Look at two markets at the same time highlight the forces that determine the economy's trade balance and exchange rate Market for loanable funds Market for foreign currency exchange S & D for Loanable funds S = I + NCO NCO = NX S & D for Foreigncurrency exchange Equilibrium in the open economy: NCO The link between 2 markets S = I + NCO, NCO = NX Simultaneous Equilibrium in two markets How policies and events Affect an open economy: Government budget deficit Trade policy Political instability and capital flight ...
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