1
Short-run Fluctuations in
an Open Economy
Tutional BBA
International Economics.
P’ O
Tuitional BBA
International Economics
Contact no. 089-136-3264
2
Balance of Payment.
3
The BP Curve
•
BP curve – a curve that represents combinations of interest rates
and income levels at a given exchange rate at which the Balance of
payment is in equilibrium.
CA deficit/surplus
CA
Y
Y l
Î
e constant
Î
Im l
Î
CA ……….
4
KA
i
KA deficit/surplus
r l
Î
Cap ……
Î
KA ………
i
Y
BP Curve
Y
0
r
w
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•
If income increases, the CA will be in deficit.
•
To keep the BP in equilibrium, the interest rate must rise enough to
bring the KA into surplus to offset.
•
A rise in income requires a rise in interest rate. A decline in income
require a decline in interest rates.
i
Y
BP Curve
Surplus
zone
Deficit
Zone
A
At point A, the BP is in surplus b/c, the interest is higher than the interest rate that is
Consistent with a BP of equilibrium.
6
•
The slope of the BP curve.
Î
Depends on 2 factors.
1.
The responsiveness of capital flows to interest.
2.
The responsiveness of imports to income.
Î
MPM
•As cap flows become
more responsive to diff
between domestic and
world i.
Î
BP flatter.
•As import become more
responsive to change in
income (MPM increase)
Î
BP steeper.
7
Policies that shift the BP curve
1.
Exchange rates policies.
–
change e
Î
BP shift to new equilibrium
BP
0
A
• Initially, at A, BP = 0.
• e Depre
Î
X l & Im l
Î
at A BP surplus
• To equilibrium, Y l or i l
• If
i
l
Î
Move to point B
• If Y
l
Î
Move to point C
• The
BP
1
represents all combinations of
Y and i at which BP = 0.
• Depre
Î
BP shift ………..
• Appre
Î
BP shift …………….
8
Policies that shift the BP curve
2.
Import control and Export Drives.

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- Spring '10
- Miko
- Interest Rates, Monetary Policy, bp curve
-
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