Mych13b - Chapter 13 Open economy macro-economics...

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Chapter 13 Open economy macro-economics (Continued) IS-LM analysis for an open economy The flexible exchange rate The fixed exchange rate 1
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2 There are three purposes to be pursued 1.To extend the familiar IS-LM analysis to the open economy 2.To answer questions about the NX as a byproduct 3.To trace how the fluctuations of the economic activities got transmitted internationally
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3 We live in a globalized environment Given : The IS curve is the only graphic element to be modified in ‘opening up’ the economy. Wanted : - How is the open economy IS derived? - How does it vary in response to various causes?
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What is known What is to be known 4 Deriving the open economy IS NX(r; Y) S(r: Y) – I(r) r r Y Open economy IS
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5 Y Y ° + Y r $ NX(r; Y) S(r ; Y) – I(r) Y ° IS NX = 0 Deriving the open economy IS
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6 r $ NX(r; Y) S(r ; Y) – I(r) Y ° NX = 0 Deriving the open economy IS The known
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7 Y Y ° + Y r $ Y ° IS Deriving the open economy IS To be known
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8 r $ r Y S(r; Y ° ) – I(r) S(r; Y ° + Y) – I(r) NX(r; Y ° ) NX(r; Y ° + Y) Open Economy IS Y ° Y ° + Y Deriving open economy IS Y ° Y + Y
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9 Varying open economy IS at home S(r; Y, .) – I(r) NX(r; Y, .) Open economy IS
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Varying open economy IS S(r; Y, .) – I(r) NX(r; Y, .) G Y r r IS A. Temporary increase of G Less public spending, more private consumption, interest rises. Varying open economy IS
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Mych13b - Chapter 13 Open economy macro-economics...

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