IEU - Lecture 9 - Open Macro with fixed ER

IEU - Lecture 9 - Open Macro with fixed ER - Izmir...

Info iconThis preview shows pages 1–8. Sign up to view the full content.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Izmir University of Economics ECON 306 INTERNATIONAL ECONOMICS Lecture 9 Internal and External Balance with Fixed Exchange Rates Impact of an external shock under fixed ER i Y BP i LM Given the equilibrium, if foreign income increases exports will increase. IS i Y i LM IS The increase in exports will shift the BP curve to the right because any given level of income can now be associated with a lower level of interest rate and still have BoP equilibrium. Impact of an external shock under fixed ER BP i Y i The increase in exports will also shift the IS curve to the right. Impact of an external shock under fixed ER LM BP IS i Y i To defend fixed ER the central bank must purchase the surplus foreign currency and increase money supply which shifts the LM curve to the right. Impact of an external shock under fixed ER LM BP IS i Y Y 1 i An increase in government spending (G ↑ ) or a decrease in taxes (T ↓ ) shifts the IS curve to the right, putting upward pressure on domestic income and interest rate. The effect of expansionary fiscal policy – Complete capital immobility LM BP IS i i As the economy expands, imports and demand for foreign currency increase. To maintain the ER the central bank sells foreign currency (buys domestic currency) which reduces...
View Full Document

This note was uploaded on 08/06/2009 for the course ECONOMICS ECON 306 taught by Professor Alperduman during the Spring '09 term at Izmir University of Economics.

Page1 / 26

IEU - Lecture 9 - Open Macro with fixed ER - Izmir...

This preview shows document pages 1 - 8. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online