Topics7-10_Review - ECON 303 Intermediate Economic Theory Macroeconomics I Topics 7 \u2212 10 Review Muna Esheba November 7 2019 Outline I The Goods

# Topics7-10_Review - ECON 303 Intermediate Economic...

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ECON 303: Intermediate Economic Theory Macroeconomics I Topics 7 - 10 Review Muna Esheba November 7, 2019
Outline I The Goods Market in an Open Economy I Output, the Interest Rate, and the Exchange Rate I The Labour Market I All Markets Together: The AS - AD Model Esheba (U of C) Topics 7 - 10 Review November 7, 2019 1 / 26
The Goods Market in an Open Economy The demand for domestic goods I The demand for domestic goods ( Z ) is given by Z C ( Y - T ) ( + ) + I ( Y , i ) (+ , - ) + G + NX ( Y , Y * , ) ( - , + , +) where I Y is the level of domestic output I Y * is the level of foreign output I is the real exchange rate, EP * P I Net exports ( NX ) are the difference between exports ( X ) and imports ( Q ): NX ( Y , Y * , ) ( - , + , +) X ( Y * , ) (+ , +) - Q ( Y , ) (+ , - ) X > Q = a trade surplus and X < Q = a trade deficit. Esheba (U of C) Topics 7 - 10 Review November 7, 2019 2 / 26
The Goods Market in an Open Economy Equilibrium condition I The goods market is in equilibrium when domestic output ( Y ) equals the demand for domestic good ( Z ): Y = Z Y = C ( Y - T ) + I ( Y , i ) + G + NX ( Y , Y * , ) I This equilibrium condition determines output as a function of all exogenous variables (taxes T , real exchange rate , foreign output Y * ) I Note that I The equilibrium level of output is given by the condition Y = Z I The level of output at which there is trade balance is given by the condition Q ( Y , ) = X ( Y * , ). Esheba (U of C) Topics 7 - 10 Review November 7, 2019 3 / 26
The Goods Market in an Open Economy Esheba (U of C) Topics 7 - 10 Review November 7, 2019 4 / 26
The Goods Market in an Open Economy Esheba (U of C) Topics 7 - 10 Review November 7, 2019 5 / 26
The Goods Market in an Open Economy Esheba (U of C) Topics 7 - 10 Review November 7, 2019 6 / 26
Topics 7 - 10 Review November 7, 2019 7 / 26
Outline I The Goods Market in an Open Economy X I Next: Output, the Interest Rate, and the Exchange Rate Esheba (U of C) Topics 7 - 10 Review November 7, 2019 8 / 26
Output, Interest Rate, and the Exchange Rate The Interest Parity Relation E = ¯ E e 1 + i - i * I i = ⇒↓ E , i = ⇒↑ E I Changes in i * or ¯ E e shift the interest parity curve ( IPC ) to the right or to the left. Esheba (U of C) Topics 7 - 10 Review November 7, 2019 9 / 26