Econ110BW11 - Lec19 A - GR_ol

Econ110BW11 - Lec19 A - GR_ol - Macroeconomics B Econ 110B,...

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Macroeconomics B Econ 110B, Winter 2011 Prof. Giacomo Rondina Lecture 19
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2 The Open Economy ± Fiscal Policies and Exchange Rate Policies ± Mundell Fleming Model The Goods Market in an Open Economy (Ch. 19)
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3 Openness in Goods and Financial Markets (Ch. 18) Equilibrium in the Open Economy: DD ZZ NX Diagram Demand Y DD DD : C ( Y - T ) + I ( Y ,r ) + G AA : DD - IM ( Y , ε ) ZZ : AA+ X ( Y * , ε ) Parallel to AA AA ZZ IM/ ε X Trade Balance (Net Exports) NX = X IM/ ε Y NX Y TB NX
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4 Equilibrium in the Open Economy: Market for Goods Demand Y DD Equilibrium: Y = Z 1. Draw the 45 line 2. Determine Y 0 where ZZ crosses the 45 line. 3. Determine Trade Balance (NX) in Equilibrium ZZ Y NX Y TB NX 45 Y 0 NX 0 <0 Y 0 Equilibrium: Y 0 , NX 0 <0 The Goods Market in an Open Economy (Ch. 19)
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5 Equilibrium in the Open Economy: DD ZZ NX Diagram ± Use of Equilibrium Diagram 1. Changes in Domestic Demand (Government Spending and Taxes Policies) 2. Changes in Foreign Demand 3. Changes in Real Exchange Rate (Exchange Rate Policies) 4. Government and Exchange Rate Policies Combined The Goods Market in an Open Economy (Ch. 19)
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6 Equilibrium in the Open Economy: Market for Goods Demand Y 1. Changes in Domestic Demand Suppose that the open economy is in equilibrium in the market for goods at output Y 0 such that the trade balance is zero. 1. Represent the equilibrium using the DD-ZZ-NX diagram. 2. Suppose that the Government implements an increase in Domestic Demand by reducing taxes (or increasing Government spending). What is the effect on equilibrium output? What is the effect on the trade balance? Y NX The Goods Market in an Open Economy (Ch. 19)
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7 Equilibrium in the Open Economy: Market for Goods Demand Y 1. Changes in Domestic Demand Suppose that the open economy is in equilibrium in the market for goods at output Y 0 such that the trade balance is zero. 1. Represent the equilibrium using the DD-ZZ-NX diagram. 2. Suppose that the Government implements an increase in Domestic Demand by reducing taxes (or increasing Government spending). What is the effect on equilibrium output? What is the effect on the trade balance? Y NX The Goods Market in an Open Economy (Ch. 19)
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8 Equilibrium in the Open Economy: Market for Goods Demand Y Y NX 45 1. Changes in Domestic Demand Suppose that the open economy is in equilibrium in the market for goods at output Y 0 such that the trade balance is zero. 1. Represent the equilibrium using the DD-ZZ-NX diagram. 2. Suppose that the Government implements an increase in Domestic Demand by reducing taxes (or increasing Government spending). What is the effect on equilibrium output? What is the effect on the trade balance? The Goods Market in an Open Economy (Ch. 19)
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9 Equilibrium in the Open Economy: Market for Goods Demand Y ZZ Y NX 45 Y 0 1. Changes in Domestic Demand Suppose that the open economy is in equilibrium in the market for goods at output Y 0 such that the trade balance is zero.
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Econ110BW11 - Lec19 A - GR_ol - Macroeconomics B Econ 110B,...

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