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IEU - Lecture 8 - Open Makro - Izmir University of...

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Izmir University of Economics ECON 306 INTERNATIONAL ECONOMICS Lecture 8 How Does the Open Macroeconomy  Work?
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The Keynesian Income Model E = C + I + G + X – M C = a + b Yd         Yd = Y – T a = autonomous consumption spending. (r, population,  accumulated wealth, expected future income) b = marginal propensity to consume  MPC =  C /  Yd
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The Keynesian Income Model Yd = C + S Yd = a + b Yd + S S = Yd – (a + b Yd) S = – a + (1-b) Yd S = – a + s Yd s = marginal propensity to save MPS =  S /  Yd
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The Keynesian Income Model I = I* = 180     (r, w, expectations) G = G*  = 600     (national defense, education, policy  measures, infrastructure) T = T* = 500     (wealth and property – not income) X = X* = 140     (Foreign income, tradable prices,  productivity, foreign tastes)     M = M* + mY     M = 20 + 0.1 Y
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The Keynesian Income Model E = C + I + G + X – M E = 100 + 0.8 Yd + 180 + 600 + 140 – (20 + 0.1 Y) E = 600 + 0.7 Y E = Y 600 + 0.7 Y = Y Y = 600 / 0.3 = 2000
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E = C+I+G+X-M        600  (=a-bT*+I+ G*+X*-M*) Desired spending: E = C+I+G+X-M     Yd (income or production)   2000 0.7 (=MPC-MPM)
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              S+T+M S+T+M I+G+X     Yd (income or production)   2000 I+G+X S+T+M = I+G+X
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The autonomous spending multilier If autonomous spending on C, I, G or X is changed, by how  much will equilibrium income be changed?  k = 1 / 1 – (a - m)  k = 1 / 1 – (0.8 - 0.1)  k = 1 / 1 – (0.7)  k = 1 / 0.3 = 3.33 Or  K = 1 / (s + m) Open economy multilier:  Y = 3.33 x  I
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Current Account and Multiplier If we want to eliminate the current account deficit,  we need to reduce Y. Our deficit  X – M =  140 – 220 = -80 ∆M = MPM x ∆Y -80 = 0.10 x ∆Y ∆Y = -800
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Current Account and Multiplier Or we can increase exports.
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