Lecture 11_international_2009

Lecture 11_international_2009 - This lecture Recap on...

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Slide 1 This lecture Recap on monetary policy in a closed economy Recap on 4-sector models AD-AS Flexible exchange rate determination Open economy demand management policies with flexible exchange rates
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Slide 2 Monetary policy recap RBA sets Immediate change Lagged change Adapted from Graph 4: http://www.rba.gov.au/MonetaryPolicy/about_monetary_policy.html Inflation rate if viewed over time GDP growth if viewed over time Employment, Unemployment change Cash rate change filters through to investment lending rates I and C change
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Slide 3 Getting rid of inflation: Tight monetary policy AD shifts to the left by same amount Fall in real GDP and… … a fall in the General Price Level. Note: If wages and prices downwardly sticky then ‘ratchet effect’ will see prices stick at P0 which implies a fall in the inflation rate rather than a fall in the absolute GPL to P1. Notice that reduction in AD could be too severe and although inflation is controlled, U results
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Slide 4 Getting rid of recession: Easy monetary policy AD shifts to the right by multiplied amount Rise in real GDP and but no rise (or negligible rise) in the General Price Level Fall in cyclical unemployment… Notice however that rise in General Price Level is possible if shift in intermediate range of AS
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Slide 5 Recap on how foreign sector fits in Circular flow Add X Subtract M Expenditures model X = f (GPL vs foreign GPL, exchange rates, foreign GDP) M = f (domestic GDP, GPL vs foreign GPL, exchange rates) NX = X-M makes E flatter and alters intercept of E function Called ‘terms of trade’
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Slide 6 AD-AS model Since NX part of E, NX also part of AD ↑NX→↑E →multiplier effect →shift to right of AD When the GPL of trading partners is constant, an increase in domestic GPL, makes domestic products (e.g. X) more expensive and M cheaper so that a higher GPL is associated with a lower AD (move up AD curve) & vice-versa
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Slide 7 Demand management in a global setting Demand management policies have impact on exchange rates Exchange rates have feedback effects on NX and hence AD Exchange rates determined in forex markets
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Exchange rate definition The exchange rate is the foreign currency price of one Australian dollar indirect exchange rate quoted in the papers Indirect quote of the Australian dollar might be today’s quote A$1 = US$0.78 or £0.49 direct quote of the Australian dollar might be US$1 = 1/0.78=A$1.28 or £1=1/0.49=A$2.04 textbooks often discuss the determination of a direct quotation See p 95 “dollar price of one pound”
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Slide 9 Demand for A$ Same A$100 ticket costs 40 pounds when the exchange rate drops to 0.40. Quantity of currency
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This note was uploaded on 10/19/2011 for the course ECON 1007 taught by Professor Macroeconomics during the Three '08 term at South Australia.

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Lecture 11_international_2009 - This lecture Recap on...

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