Lesson_71_Monetary Policy with Fixed Exchange Rates

Lesson_71_Monetary Policy with Fixed Exchange Rates -...

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1 Lesson 71 1 Monetary Policy with Fixed Exchange Rates We saw in earlier lesson that it may not be possible to simultaneously control exchange rate and money supply In this lesson, we elaborate to show that monetary policy may be ineffective way to manage economic activity with fixed exchange rate Lesson 71 2 We continue with our example of a country that pegs the value of its currency (the peso) against the dollar Y i EB 0 LM 0 IS Lesson 71 3 Again start from a position where IS & LM intersect at a point on EB curve Y i EB 0 LM 0 IS
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2 Lesson 71 4 IS & LM determine equilibrium i and Y , which are consistent with external balance in this situation Y i EB 0 LM 0 IS Lesson 71 5 But what if income is too low? Can monetary policy be used to increase income? Y i EB 0 LM 0 IS Lesson 71 6 Expansionary monetary policy shifts LM to right…putting the new intersection below and to right of EB Y i EB 0 LM 0 IS 1 LM
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3 Lesson 71 7 No longer at external balance…official settlements in deficit…weak demand for
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Lesson_71_Monetary Policy with Fixed Exchange Rates -...

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