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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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