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Lesson_67_Macroeconomic Policy Coordination

Lesson_67_Macroeconomic Policy Coordination - Macroeconomic...

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1 Lesson 67 1 Macroeconomic Policy Coordination Fiscal policy is blunted when the exchange rate is flexible Monetary policy is highly effective, but works largely through the effect on the exchange rate Changes in the exchange rate have implications for country’s trade partners This lesson explores those implications Lesson 67 2 Suppose there are two countries (the U.S. and “Euroland” Suppose that the exchange rate between the euro and the dollar is completely flexible Further suppose that the U.S. is in the midst of an economic downturn, calling for expansionary monetary policy Lesson 67 3 Fed pumps dollars into the economy U.S. interest rates fall, stimulating real investment but making dollar-denominated financial investments less attractive, thereby putting downward pressure on the value of the dollar If M-L is satisfied, U.S. CA improves, further stimulating U.S. economic activity
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