Notes Apr26 - IS: Changes in interest rate LM: Changes in y...

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IS: Changes in interest rate LM: Changes in y cause change in i IS LM i y
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FE i y CA + Non Official + Official Financial Account = 0 CA, NFA are decisions made by millions of decentralized OFA is FE represents equilibrium in FOREX market
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When a country’s exchange rate floats, OFA = 0. Price of Foreign Currenc y Q$ S $ D $ Draw this picture assuming only non-official Demands and Supplies of $. No central bank activity. Demand for dollars represents credit entries (+) in the US balance of payments. Supply of dollars represents debit entries (-) in the US balance of payments. At equilibrium exchange rate, debits = credits.
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Price of Foreig n Curren cy Q$ S $ D $ When U.S. interest rate rises - D$ increases - S$ decreases - Dollar Appreciates Price of Foreig n Curren cy Q$ S1 $ D $ S2 $ When U.S. Income increases - Supply curve shifts right
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CA(E1 Y) + NFA(i) = 0 Y increases i increases If Y and i both increase while E is constant, CA + NFA = 0 continues to hold. F
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This note was uploaded on 10/04/2011 for the course EC 340 taught by Professor Ballie during the Spring '10 term at Michigan State University.

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Notes Apr26 - IS: Changes in interest rate LM: Changes in y...

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