Lesson_61_A Simple Open-Economy Macro Model

Lesson_61_A Simple Open-Economy Macro Model - A Simple...

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1 Lesson 61 1 A Simple Open-Economy Macro Model The current account balance depends, in part, on the exchange rate Changes in the current account can affect GDP Other changes in the economy can affect both GDP and the current account This lesson starts to tie these relationships together Lesson 61 2 Review ( ) YCIG E XI M =+++ YCIGC A Interpreting Y as GDP Interpreting Y as National Income ( NI ) YCTS =++ Lesson 61 3 Review C I G CA GDP Y NI C S T ++ + = = = = ++ Putting the two together Subtract I and G from both sides: ( ) CA S T G I =+ − −
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2 Lesson 61 4 Explore the right-hand side of the equation Assume that T and G are government policy parameters, determined by choice Assume that I is exogenous also (that is, is not determined within the system, but is taken as given from somewhere outside the model) Lesson 61 5 That leaves S Saving might depend on a lot of things, but most important for our purposes, S depends on income Higher income implies more saving Symbolically, we will write ( ) SY + Lesson 61 6 Since S depends positively on Y, and all other terms on the right-hand side are exogenous, the entire right-hand side depends positively on income We can graph this relationship
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3 Lesson 61 7
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This note was uploaded on 09/14/2009 for the course ECON 340 taught by Professor Leidholm during the Summer '08 term at Michigan State University.

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Lesson_61_A Simple Open-Economy Macro Model - A Simple...

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