{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

321LecNote13Ch12

321LecNote13Ch12 - Instructor Kim H.H Fall 2009...

Info icon This preview shows pages 1–6. Sign up to view the full content.

View Full Document Right Arrow Icon
Instructor : Kim, H.H. Intermediate Macro Analysis Fall 2009 Economics 01:220:321 1 Chapter 5. The Open Economy Revisited : The Mundell –Fleming Model and the Exchange Rate Regime In this chapter, you will learn: • the Mundell-Fleming model (IS-LM for the small open economy) • causes and effects of interest rate differentials • arguments for fixed vs. floating exchange rates • how to derive the aggregate demand curve for a small open economy The Mundell-Fleming model • Key assumption: Small open economy with perfect capital mobility. r = r* • Goods market equilibrium – the IS* curve: Where The IS* curve: Goods market eq’m The IS* curve is drawn for a given value of r*. Intuition for the slope: Y e
Image of page 1

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Instructor : Kim, H.H. Intermediate Macro Analysis Fall 2009 Economics 01:220:321 2 The LM* curve: Money market eq’m The LM* curve: • is drawn for a given value of r*. • is ___________ because: given r*, there is only one value of Y that equates money demand with supply, regardless of e. Equilibrium in the Mundell-Fleming model Floating & fixed exchange rates • In a system of floating exchange rates, e is allowed to __________ in response to changing economic conditions. • In contrast, under fixed exchange rates, the central bank trades domestic for foreign currency at a ________________________. • Next, policy analysis – – first, in a floating exchange rate system – then, in a fixed exchange rate system Y e Y e
Image of page 2
Instructor : Kim, H.H. Intermediate Macro Analysis Fall 2009 Economics 01:220:321 3 Fiscal policy under floating exchange rates At any given value of e, a fiscal expansion increases Y, __________________________________ Lessons about fiscal policy • In a small open economy with perfect capital mobility, fiscal policy _____________________ ________________________ • ___________________________ – closed economy: Fiscal policy ___________________________ by causing the ______________ to ________________. – small open economy: Fiscal policy ___________________________ by causing the ______________ to ________________. Y e LM * IS *
Image of page 3

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Instructor : Kim, H.H. Intermediate Macro Analysis Fall 2009 Economics 01:220:321 4 Monetary policy under floating exchange rates An increase in M ________________ because Y must ______ to restore eq’m in the money market. Lessons about monetary policy • Monetary policy affects output by affecting the components of aggregate demand: closed economy: M r I Y small open economy: M e NX Y • Expansionary mon. policy ________________________________, it merely shifts demand from foreign to domestic products. So, the increases in domestic income and employment are _____________________________________. Y e LM * IS *
Image of page 4
Instructor : Kim, H.H. Intermediate Macro Analysis Fall 2009 Economics 01:220:321 5 Trade policy under floating exchange rates At any given value of e, a tariff or quota __________________, ____________________________, and ______________________________. Lessons about trade policy • Import restrictions _________________________________ • Even though NX is unchanged, there is ______ trade: – the trade restriction _______________________ – the exchange rate appreciation _____________________ • Less trade means ____________________________ • Import restrictions on specific products save jobs in the domestic industries that produce those products, but destroy jobs in export-producing sectors.
Image of page 5

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 6
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern