Econ110BW11 - Lec20 A - GR_ol (1)

# Econ110BW11 - Lec20 A - GR_ol (1) - Macroeconomics B Econ...

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Macroeconomics B Econ 110B, Winter 2011 Prof. Giacomo Rondina Lecture 20

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Announcements ffice Hours this Friday, February 25 ± Office Hours this Friday, February 25 5:15pm to 6:15pm 1:30pm to 2:30pm ± Review Session in preparation for Final Exam t d Mh 12 10 00 t 11 50 Ct Hl l 113 Saturday March 12 th , 10:00am to 11:50am , Center Hall 113 2 The Goods Market in an Open Economy (Ch. 19)
The Open Economy undell eming Model: IS in the Open Economy ± Mundell Fleming Model: IS LM in the Open Economy 3 The Goods Market in an Open Economy (Ch. 19)

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Equilibrium in the Open Economy: Market for Assets t i M Domestic Money Domestic Bonds Foreign Bonds ± LM : Choice between Money and Domestic Bonds M L i ± UIP : Choice between Domestic and Foreign Bonds ( ) YL i P = ( ) * * 1 1 1 1 e e Ei i iE E + + += = + 4 Output, the Interest Rate and the Exchange Rate (Ch. 20)
Equilibrium in the Open Economy: Market for Assets ± UIP ¾ additional assumptions * 1 1 e i EE i + = + (1) expectations about future exchange rate constant E’ e = Ē e Important Implications of (1) a) if Ē e then E b) if i then E c) if i * then E Example : consider Japanese bonds ( i * =5% ) and US bonds ( i=5% ). Assume that E = ¥100 and Ē e = ¥100 . uppose at y 0 at 0 ) ys at ² Suppose that Ē e by 10% so that Ē e = ¥110 . (a) says that E to E = ¥110 . What is the economic explanation (Demand and Supply)? ² Suppose that i by 3% to i= 8% .(b )saystha t E .Wha tisthe conomic xplanation emand d pply)? 5 economic explanation (Demand and Supply)? Output, the Interest Rate and the Exchange Rate (Ch. 20)

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Equilibrium in the Open Economy: Market for Assets ± UIP ¾ additional assumptions * 1 1 e i EE i + = + (1) expectations about future exchange rate constant E’ e = Ē e (2) P=P*=1 which implies ε =E plication f y ppreciation epreciation) e Implication of (2): any appreciation (depreciation) in the nominal exchange rate will correspond to a real appreciation (depreciation) and ε ⇒↑ ⇒↓ 6 Output, the Interest Rate and the Exchange Rate (Ch. 20)
Equilibrium in the Open Economy: Market for Assets ± UIP ¾ additional assumptions * 1 1 e i EE i + = + (1) expectations about future exchange rate constant E’ e = Ē e (2) P=P*=1 which implies ε =E ) e hich plies (3) π = 0 which implies r = i 7 Output, the Interest Rate and the Exchange Rate (Ch. 20)

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Equilibrium in the Open Economy: Market for Assets ± UIP ¾ additional assumptions * 1 1 e i EE i + = + (1) expectations about future exchange rate constant E’ e = Ē e (2) P=P*=1 which implies ε =E ) e hich plies (3) π = 0
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## This note was uploaded on 01/18/2012 for the course ECON 101 taught by Professor Bansak during the Summer '07 term at San Diego State.

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Econ110BW11 - Lec20 A - GR_ol (1) - Macroeconomics B Econ...

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