Lesson_67_Macroeconomic Policy Coordination

Lesson_67_Macroeconomic Policy Coordination - Macroeconomic...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
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
Background image of page 1

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

View Full DocumentRight Arrow Icon
2 Lesson 67 4 HOWEVER Depreciation of dollar is same as appreciation of euro Improvement of U.S. CA comes at expense of deterioration in Euroland’s CA Euroland’s IS curve shifts left, reducing
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

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.

Page1 / 8

Lesson_67_Macroeconomic Policy Coordination - Macroeconomic...

This preview shows document pages 1 - 3. Sign up to view the full document.

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