Unformatted text preview: loating exchange rates Floating exchange rates:
Floating
The BP curve ISLMBP analysis: floating exchange rates
r
SURPLUS
BP O Y ISLMBP analysis: floating exchange rates
r
SURPLUS Appreciation
BP O Y ISLMBP analysis: floating exchange rates
r BP DEFICIT O Y ISLMBP analysis: floating exchange rates
r BP Depreciation
DEFICIT O Y ISLMBP analysis: floating exchange rates Effect of an expansionary
Effect
fiscal policy
under floating exchange rates ISLMBP analysis: floating exchange rates
r LM
b r2
r1 BP a IS2
IS1
O Y1 Y2 An expansionary fiscal policy Y ISLMBP analysis: floating exchange rates
r LM
b r2
r1 BP a IS1 IS2 Balance of payments
surplus causes the
exchange rate to appreciate
O Y1 Y2 An expansionary fiscal policy Y ISLMBP analysis: floating exchange rates
r LM
b r2
r1 BP
The appreciation
causes the IS curve
to shift to the left a IS1 O Y1 Y2 An expansionary fiscal policy IS2 Y ISLMBP analysis: floating exchange rates
r LM r2 c r3
r1 BP2
BP1 b Full equilibrium is
restored at point c a IS2
IS3
IS1
O Y1 Y3 Y2 An expansionary fiscal policy Y ISLMBP analysis: floating exchange rates
r BP1 LM
r2
r1 a b IS2
IS1
O Y1 Y2 An expansionary fiscal policy:
BP curve steeper than LM curve
LM Y ISLMBP analysis: floating exchange rates
r BP1 LM
r2
r1 a b Balance of payments
deficit causes exchange
rate to depreciate IS2
IS1
O Y1 Y2 An expansionary fiscal policy:
BP curve steeper than LM curve
LM Y ISLMBP analysis: floating exchange rates
r BP1 LM
r2...
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 Spring '09
 Macroeconomics, Deficit, Monetary Policy, Foreign exchange market, foreign exchange markets, ISLMBP analysis

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