Econ110BW11 - Lec21 A - GR_ol (1)

# Econ110BW11 - Lec21 A - GR_ol (1) - Macroeconomics B Econ...

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Macroeconomics B Econ 110B, Winter 2011 Prof. Giacomo Rondina Lecture 21

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2 Announcements ± Office Hours this Friday, February 25 5:15pm to 6:15pm ± Review Session in preparation for Final Exam Saturday March 12 th , 10:00am to 11:50am , Center Hall 113 ± Solutions to PS 6 posted ± Problem Set 7 (last one) will be posted next week. ± Chapter 21: Skip Section 21 1 The Goods Market in an Open Economy (Ch. 19)
Equilibrium in the Open Economy: Mundell Fleming Model 3 i E UIP i Y LM IS i 0 Y 0 i 0 E 0 ¾ Equilibrium: Y 0 , i 0 , E 0 ( ) ( ) ( ) () * * : , , , 1 : 1 e I SY C Y T I Y i G N X Y Y E Mi L MY L i U I P EE Pi =− + + + + == + Output, the Interest Rate and the Exchange Rate (Ch. 20)

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Mundell Fleming Model: Fixed the Exchange Rate ± UIP ¾ fixed exchange rate ¾ implication for domestic LM ¾ example: suppose demand increases so that Y ± Closed economy: no need to intervene if not desired, i ± Open economy, flexible exchange rate: same, with i and E ± Open economy, fixed exchange rate: i=i * and E fixed so M 4 * 1 1 e i EE i + = + Output, the Interest Rate and the Exchange Rate (Ch. 20) Monetary Authority loses independence of Monetary Policy! () * M YL i P = * * 1 1 e i E E E E ii i + =⇒ =⇒= = +
Mundell Fleming Model: Fiscal Expansion under Fixed Exchange Rate 5 i E UIP 0 i Y LM 0 IS 0 i 0 =i * Y 0 E 0 = Ē Output, the Interest Rate and the Exchange Rate (Ch. 20) IS 1 G 1. IS shifts right from IS 0 to IS 1 2. Given the same M/P , i and puts pressure on E (from UIP) 3. Exchange Rate is to be kept fixed so Monetary Authority forced to increase M , LM shifts right to LM 1 ¾ Final Outcome: Y 0 ’, i 0 =i * and E 0 = Ē LM 1 Y 0

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Mundell Fleming Model: Consumer Confidence under Fixed Exchange Rate 6 i E UIP 0 i Y LM 0 IS 0 i 0 =i * Y 0 E 0 = Ē Output, the Interest Rate and the Exchange Rate (Ch. 20) 1. IS shifts left from IS 0 to IS 1 2. Given the same M/P , i and puts pressure on E
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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 - Lec21 A - GR_ol (1) - Macroeconomics B Econ...

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