Chap026

Chap026 - Chapter 26 Economic Policy in the Open Economy...

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Chapter 26 – Economic Policy in the Open Economy Under Flexible Exchange Rates CHAPTER 26 ECONOMIC POLICY IN THE OPEN ECONOMY UNDER FLEXIBLE EXCHANGE RATES Learning Objectives: To grasp the impact of fiscal policy on income, trade, and exchange rates under flexible exchange rates. To grasp the impact of monetary policy on income, trade, and exchange rates under flexible exchange rates. To understand how external economic shocks affect the domestic economy under flexible exchange rates. I. Outline Introduction - Is There a Case for Flexible Rates? The Effects of Fiscal and Monetary Policy under Flexible Exchange Rates with Different Capital Mobility Assumptions - The Effects of Fiscal Policy under Different Capital Mobility Assumptions - The Effects of Monetary Policy under Different Capital Mobility Assumptions - Policy Coordination under Flexible Exchange Rates The Effects of Exogenous Shocks in the IS/LM/BP Model with Imperfect Mobility of Capital Summary II. Special Chapter Features Concept Box 1: Real and Financial Factors that Influence the BP Curve In the Real World: Commodity Prices and U.S. Real GDP, 1972-2006 In the Real World: Policy Frictions in an Interdependent World In the Real World: Macroeconomic Policy Coordination, the IMF, and the G-7 26-1
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Chapter 26 – Economic Policy in the Open Economy Under Flexible Exchange Rates III. Purpose of Chapter The purpose of this chapter is to introduce students to the adjustment mechanisms under a flexible exchange rate system and to make them aware of the implications of flexible exchange rates for the use of domestic policy instruments. IV. Teaching Tips A. The opening paragraph sketches some choices that have been made by several different countries regarding their exchange rate regimes. Students will be inclined to think that such choices affect principally the foreign sector, with some spillovers to the domestic economy. You should stress that the choice has much wider implications, however, because it conditions the overall relative effectiveness of different macroeconomic policy instruments for guiding the economy toward the country’s preferred goals. B. One of the keys to understanding the analysis in this chapter is grasping how changes in the exchange rate, along with other variables, shift the BP curve back and forth. It is important to review this (again) before you get into the content of the chapter. C. The various assumptions regarding capital mobility are more critical under flexible rates than under fixed rates. This point can be driven home in the case of fiscal policy actions that have less and less impact on income as capital becomes more and more mobile. Discuss the implications of this in today’s world where financial markets are becoming increasingly interdependent and capital more and more mobile among the major financial centers of the world. D.
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This note was uploaded on 11/27/2009 for the course ECON 421 taught by Professor Macphee,c during the Spring '08 term at UNL.

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Chap026 - Chapter 26 Economic Policy in the Open Economy...

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