The IS - upward pressure 2. internal balance - control AD...

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The IS/LM/BP Model The IS curve tells us what value of the real interest rate clears the goods market for any given value of real income. It shows combinations of Y and r for which the goods market is in equilibrium. S equals I at all points along the IS curve. The IS curve is downward sloping because higher Y leads to higher S which requires a lower r to bring the goods market into equilibrium. The LM curve traces out those combinations of r and Y for which the asset market is in equilibrium, holding everything else constant. Assume a fixed exchange rate regime. There are two policy problems under fixed exchange rates: 1. external balance - maintaining the BOP so the exchange rate can remain fixed because a BOP deficit puts downward pressure on the value of the dollar while a BOP surplus puts
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Unformatted text preview: upward pressure 2. internal balance - control AD to maintain full-employment without inflation With fixed exchange rates, the BOP reflects private trading between the domestic and foreign currency. A BOP surplus causes a net inflow of money from abroad while a BOP deficit causes a net outflow. influences on BOP 1. current account balance = NX(Y, R) 2. financial capital flows = F(r) The BP line shows combinations of Y and r that allow equilibrium in the foreign exchange market. Point to the left of the BP line represent a BOP surplus while points to the right of the line represent a BOP deficit. In the short run the economy is in equilibrium at the intersection of the IS and LM curves. Equilibrium can be at any BOP position: surplus, deficit, or balanced....
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This note was uploaded on 11/22/2011 for the course FIN FIN1100 taught by Professor Bradrifkin during the Fall '09 term at Broward College.

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The IS - upward pressure 2. internal balance - control AD...

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