0321316762_IM_16

0321316762_IM_16 - Chapter 16 Output and the Exchange Rate...

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Chapter 16 Output and the Exchange Rate in the Short Run T Chapter Organization Determinants of Aggregate Demand in an Open Economy Determinants of Consumption Demand Determinants of the Current Account How Real Exchange Rate Changes Affect the Current Account How Disposable Income Changes Affect the Current Account The Equation of Aggregate Demand The Real Exchange Rate and Aggregate Demand Real Income and Aggregate Demand How Output is Determined in the Short Run Output Market Equilibrium in the Short Run: The DD Schedule Output, the Exchange Rate, and Output Market Equilibrium Deriving the DD Schedule Factors that Shift the DD Schedule Asset Market Equilibrium in the Short Run: The AA Schedule Output, the Exchange Rate, and Asset Market Equilibrium Deriving the AA Schedule Factors that Shift the AA Schedule Short-Run Equilibrium for the Economy: Putting the DD and AA Schedules Together Temporary Changes in Monetary and Fiscal Policy Monetary Policy Fiscal Policy Policies to Maintain Full Employment
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86 Krugman/Obstfeld • International Economics: Theory and Policy, Seventh Edition Inflation Bias and Other Problems of Policy Formulation Permanent Shifts in Monetary and Fiscal Policy A Permanent Increase in the Money Supply Adjustment to a Permanent Increase in the Money Supply A Permanent Fiscal Expansion Macroeconomic Policies and the Current Account Gradual Trade Adjustment and Current Account Dynamics The J-Curve Exchange-Rate Pass-Through and Inflation Box: Exchange Rates and the Current Account Summary Appendix I: Intertemporal Trade and Consumption Demand Appendix II: The Marshall-Lerner Condition and Empirical Estimates of Trade Elasticities Online Appendix: The IS-LM and the DD-AA Model T Chapter Overview This chapter integrates the previous analysis of exchange rate determination with a model of short-run output determination in an open economy. The model presented is similar in spirit to the classic Mundell- Fleming model, but the discussion goes beyond the standard presentation in its contrast of the effects of temporary versus permanent policies. The distinction between temporary and permanent policies allows for an analysis of dynamic paths of adjustment rather than just comparative statics. This dynamic analysis brings in the possibility of a J-curve response of the current account to currency depreciation. The chapter concludes with a discussion of exchange-rate pass-through, that is, the response of import prices to exchange rate movements. The chapter begins with the development of an open-economy fixed-price model (an online Appendix discuss the relationship between the IS-LM model and the analysis in this chapter). An aggregate demand function is derived using a Keynesian-cross diagram in which the real exchange rate serves as a shift parameter. A nominal currency depreciation increases output by stimulating exports and reducing imports, given foreign and domestic prices, fiscal policy, and investment levels. This yields a positively
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0321316762_IM_16 - Chapter 16 Output and the Exchange Rate...

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