Chapter_16

# Chapter_16 - Chapter 16: Output and the Exchange Rate in...

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Chapter 16: Output and the Exchange Rate in the Short Run Determinants of Aggregate Demand (AD) in an Open Economy There are 4 sources of AD in an open economy: 1) Consumption (C) – C is determined by disposable income, Y – T. C = C(Y – T) = Autonomous C + MPC × (Y –T) 2) Investment (I) – I is determined autonomously. 3) Government spending (G) – G is determined autonomously. 4) Net export/CA – CA is determined by (Y – T) and q. CA = CA(Y – T, q) = Autonomous CA – MPI M × (Y –T) + CA 1 × q The Equation of AD ( 29 - = + + + - = T Y , P * P E q CA G I T Y C D ( 29 ( 29 ( 29 ( 29 ( 29 ) P * P E q , G , I , T , Y D( D + = + + - + = How Output is Determine in the Short Run Output market equilibrium is given by AD = AS = Output (Y). ( 29 ( 29 ( 29 ( 29 ( 29 ) P * P E , G , I , T , Y D( Y + + + - + = In the short run, P are P* are held fixed. ECMC61 – Chapter 16 1

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The DD schedule: it shows the relationship between output and the exchange rate for which the output market is in short-run equilibrium. Deriving the DD Schedule Along the D = Y line, the output market is in equilibrium. Along any aggregate demand curve (D), autonomous C, I, G, T, autonomous CA, E, P and P* are held constant. Keynesian Cross Diagram
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## This note was uploaded on 02/05/2011 for the course ECM 61 taught by Professor Jackparkinson during the Summer '10 term at University of Toronto.

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Chapter_16 - Chapter 16: Output and the Exchange Rate in...

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