Lecture_06 - IS-LM-BP analysis: fixed exchange rates Fixed...

Info iconThis preview shows page 1. Sign up to view the full content.

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

Unformatted text preview: IS-LM-BP analysis: fixed exchange rates Fixed exchange rates: Fixed The BP curve IS-LM-BP analysis: fixed exchange rates r r1 BP SURPLUS DEFICIT O Y Zero Capital Flows IS-LM-BP analysis: fixed exchange rates r BP r1 SURPLUS DEFICIT O Y Restricted Capital Flows IS-LM-BP analysis: fixed exchange rates r SURPLUS BP DEFICIT O Y1 Restricted Capital Flows Y IS-LM-BP analysis: fixed exchange rates r SURPLUS BP r1 DEFICIT O Y Unrestricted Capital Flows IS-LM-BP analysis: fixed exchange rates r BP r1 a O Y1 Y IS-LM-BP analysis: fixed exchange rates r Assume that national income rises BP r1 a O Y1 Y2 Y IS-LM-BP analysis: fixed exchange rates r Assume that national income rises BP r1 a b O Y1 Y2 Deficit if rate of interest remains at r1 Y IS-LM-BP analysis: fixed exchange rates r BP c r2 r1 a O Y1 Rate of interest must rise to r2 to restore balance of payments Y2 Y IS-LM-BP analysis: fixed exchange rates Full equilibrium in the Full goods, money and foreign exchange markets IS-LM-BP analysis: fixed exchange rates r LM BP r1 a IS O Y1 Full equilibrium in the goods, money and foreign exchange markets Y IS-LM-BP analysis: fixed exchange rates Effect of an expansionary Effect fiscal policy under fixed exchange rates IS-LM-BP analysis: fixed exchange rates r LM1 b r2 r1 BP a IS2 IS1 O Y1 Y2 An expansionary fiscal policy Y IS-LM-BP analysis: fixed exchange rates r LM1 b r2 r1 BP a Balance of payments surplus causes money supply to expand IS2 IS1 O Y1 Y2 An expansionary fiscal policy Y IS-LM-BP analysis: fixed exchange rates r LM1 b r2 r r1 LM BP c Restoration of full equilibrium a IS2 IS1 O Y1 Y2 Y An expansionary fiscal policy Y IS-LM-BP analysis: fixed exchange rates r BP LM1 r1 a IS2 IS1 O Y1 An expansionary fiscal policy: BP curve steeper than LM curve LM Y IS-LM-BP analysis: fixed exchange rates r BP LM1 b r2 r1 a IS2 IS1 O Y1 Y2 An expansionary fiscal policy: BP curve steeper than LM curve LM Y IS-LM-BP analysis: fixed exchange rates r BP LM1 b r2 r1 a Balance of payments deficit causes money supply to contract IS2 IS1 O Y1 Y2 An expansionary fiscal policy: BP curve steeper than LM curve LM Y IS-LM-BP analysis: fixed exchange rates r BP LM1 c r b r2 r1 LM Restoration of full equilibrium a IS2 IS1 O Y1 Y Y2 An expansionary fiscal policy: BP curve steeper than LM curve LM Y IS-LM-BP analysis: fixed exchange rates Effect of an expansionary Effect monetary policy under fixed exchange rates IS-LM-BP analysis: fixed exchange rates r LM1 BP r1 a IS O Y1 An expansionary monetary policy Y IS-LM-BP analysis: fixed exchange rates r LM1 LM2 BP r1 a b r2 IS O Y1 Y2 An expansionary monetary policy Y IS-LM-BP analysis: fixed exchange rates r LM1 LM2 BP r1 a b r2 Balance of payments deficit causes money supply to contract again IS O Y1 Y2 An expansionary monetary policy Y IS-LM-BP analysis: fixed exchange rates r LM1 LM2 BP r1 a b r2 Full equilibrium is restored back at point a IS O Y1 Y2 An expansionary monetary policy Y IS-LM-BP analysis: floating exchange rates Floating exchange rates: Floating The BP curve IS-LM-BP analysis: floating exchange rates r SURPLUS BP O Y IS-LM-BP analysis: floating exchange rates r SURPLUS Appreciation BP O Y IS-LM-BP analysis: floating exchange rates r BP DEFICIT O Y IS-LM-BP analysis: floating exchange rates r BP Depreciation DEFICIT O Y IS-LM-BP analysis: floating exchange rates Effect of an expansionary Effect fiscal policy under floating exchange rates IS-LM-BP analysis: floating exchange rates r LM b r 2 r 1 BP a IS2 IS1 O Y1 Y2 An expansionary fiscal policy Y IS-LM-BP analysis: floating exchange rates r LM b r 2 r 1 BP a IS1 IS2 Balance of payments surplus causes the exchange rate to appreciate O Y1 Y2 An expansionary fiscal policy Y IS-LM-BP analysis: floating exchange rates r LM b r 2 r 1 BP The appreciation causes the IS curve to shift to the left a IS1 O Y1 Y2 An expansionary fiscal policy IS2 Y IS-LM-BP analysis: floating exchange rates r LM r 2 r r 1 BP BP1 b c Full equilibrium is restored at point c a IS2 IS IS1 O Y1 Y Y2 An expansionary fiscal policy Y IS-LM-BP analysis: floating exchange rates r BP1 LM r r 2 1 a b IS2 IS1 O Y1 Y2 An expansionary fiscal policy: BP curve steeper than LM curve LM Y IS-LM-BP analysis: floating exchange rates r BP1 LM r r 2 1 a b Balance of payments deficit causes exchange rate to depreciate IS2 IS1 O Y1 Y2 An expansionary fiscal policy: BP curve steeper than LM curve LM Y IS-LM-BP analysis: floating exchange rates r BP1 LM r r 2 1 a b Depreciation causes the IS curve to shift to the right IS2 IS1 O Y1 Y2 An expansionary fiscal policy: BP curve steeper than LM curve LM Y IS-LM-BP analysis: floating exchange rates r BP1 r r r 2 1 a b c BP LM Full equilibrium is achieved at point c IS IS2 IS1 O Y1 Y2 Y An expansionary fiscal policy: BP curve steeper than LM curve LM Y IS-LM-BP analysis: floating exchange rates Effect of an expansionary Effect monetary policy under floating exchange rates IS-LM-BP analysis: floating exchange rates r LM1 LM2 BP1 r 1 a r 2 b IS1 O Y1 Y2 An expansionary monetary policy Y IS-LM-BP analysis: floating exchange rates r LM1 LM2 BP1 r 1 a r 2 b The balance of payments deficit causes the BP line to shift downward IS1 O Y1 Y2 An expansionary monetary policy Y IS-LM-BP analysis: floating exchange rates r LM1 LM2 BP1 r 1 a r 2 b The depreciation causes the IS curve to shift to the right IS1 O Y1 Y2 An expansionary monetary policy Y IS-LM-BP analysis: floating exchange rates r LM1 LM2 BP1 r 1 r BP a r 2 c b Full equilibrium is restored at point c IS IS1 O Y1 Y2 Y An expansionary monetary policy Y ...
View Full Document

This note was uploaded on 07/16/2011 for the course ECON 5319 taught by Professor Crowder during the Spring '11 term at UT Arlington.

Ask a homework question - tutors are online