Government employment agencies which disseminate

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Unformatted text preview: ve to the foreign price. The quick action of these international arbitrageurs implies that net exports are highly sensitive to small movements in the real exchange rate. A small decrease in the price of domestic goods relative to foreign goods (i.e. a small decrease in the real exchange rate) causes arbitrageurs to buy goods domestically and sell them abroad. Therefore, the net- exports schedule is very flat at the real exchange rate that equalizes purchasing power among countries. Purchasing power has two implications: first, since NX is flat, changes in saving or investment do not influence the real or nominal exchange rates. Second, since the real exchange rate is fixed, all changes in the nominal exchange rate result from changes in price levels. Although it does not provide a completely accurate description of the world, it does provide a reason why movement in the real exchange rate will be limited. The economy we have studied above is “small” in the sense that its interest rate is fixed by world financial markets. The small- open- economy specification is directly applicable to Canada. The U.S. is slightly more complicated. It is large enough to influence world financial markets. Capital may not be perfectly mobile across countries. For these two reasons we cannot directly apply our model of the small open economy to the U.S. Chapter 6 Natural rate of unemployment: the average rate of unemployment around which the economy fluctuates. It is the rate of unemployment toward which the economy gravitates in the long run. It is the structural and frictional unemployment. The labour force is the sum of the employed and unemployed, L = E + U, with the unemployment rate U/L. Let s denote the rate of job separation (fraction of employed individuals who lose their job each month) and f the Page 17 of 52 Jessica Gahtan Prof: Mokhles Hossain Macroeconomics ECON2000 Fall 2013 rate of job finding (fraction of unemployed who find a job each month). This means that the steady- state condition is: fU = sE. Therefore the ! steady- state (natural) rate of unemployment is equal to !!!. Policy aimed at lowering the natural rate of unemployment must either reduce the rate of job separation or increase the rate of job finding. Policies that affect s or f change...
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