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27-imf - Trade Macro Lecture 27-PREVIEW Dr Jennifer P...

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macroS2010 Lec27-page 1 http://www.arts.cornell.edu/econ/wissink/econ102jpw/ Trade & Macro Lecture 27-PREVIEW Dr. Jennifer P. Wissink ©2009 Jennifer P. Wissink, all rights reserved. May 3, 2010
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macroS2010 Lec27-page 2 http://www.arts.cornell.edu/econ/wissink/econ102jpw/ Monetary Policy w/ Flexible ER Recall: Expansionary Monetary Policy Now add: with relatively lower interest rates in the US an increase in the demand for pounds a decrease in the supply of pounds dollar depreciates EX and IM a boost in AE d a larger multiplier effect SO: If the purpose of the Fed is to stimulate the economy, dollar depreciation is a good thing – it helps increase the efficacy of the monetary injection. But now, suppose that inflationary pressures enter the picture... How do you think the Fed will respond? And how will a flexible ER matter?
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macroS2010 Lec27-page 3 http://www.arts.cornell.edu/econ/wissink/econ102jpw/ Monetary Policy w/ Flexible ER
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macroS2010 Lec27-page 4 http://www.arts.cornell.edu/econ/wissink/econ102jpw/ Fiscal Policy w/ Flexible Exchange Rates Consider an increase in G to increase Y* Remember: as Y* increases, M D increases r increases r Private investment is crowed out (I ) » the multiplier is lowered some more And now add: with relatively higher interest rates in the US » an increase in the supply of pounds » a decrease in the demand for pounds The dollar appreciates » EX and IM AE d falls again reducing the multiplier.
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