National income accounts how can governments manage

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Unformatted text preview: X-M S- I = Private surplus/deficit Current Account T -G + Public surplus/deficit Monetary Policy Fiscal Policy Effect of interest rate increase: Effect of fiscal stimulus: Savings (S – I) Government expenditure (T – G) Investment Equation balances when CA: (X – M) More demand for home currency: appreciates 1/27/2014 Page: 25 Equation balances when CA: (X – M) Less demand for home currency: depreciates GUY SHANI , 2014 - STRATEGY 310 - THE WORLD ECONOMY - SESSION 04 2. National income accounts Quantitative easing (QE) What is QE? • Printing money and using it to buy bonds from banks • Injects liquidity into the financial system Effect on the US Increase money supply Effect on other countries Reactivate the economy USD depreciates Inflation in the US 1/27/2014 Page: 26 Harder to export to the US Foreign holdings of US assets lose value GUY SHANI , 2014 - STRATEGY 310 - THE WORLD ECONOMY - SESSION 04 13 2. National income accounts The USD as pre-eminent global reserve currency X-M S- I = T -G + How does the status of the USD affect the US and its economic policy? • High demand for the USD • The USD remains strong even if the US economy is not • The US can borrow more • “Deficit without tears” 1/27/2014 Page: 27 GUY SHANI , 2014 - STRATEGY 310 - THE WORLD ECONOMY - SESSION 04 2. National income accounts Three economies – three paths EU Japan Different and wrong directions “Abenomics” 1. Monetary easing 2. Fiscal stimulus (deficit financed governmental spending) 3. Promoting growth through widespread reforms X-M 1/27/2014 = Page: 28 US Conflicting policy directions 1. Shared unresponsive monetary policy 2. Diverse fiscal policies (Germany vs. weaker EU economies) 3. Regulation stifling growth S- I + 1. monetary easing 2. Fiscal constraints T -G GUY SHANI , 2014 - STRATEGY 310 - THE WORLD ECONOMY - SESSION 04 14 Agenda 1. Balance of payments 2. National income accounts 3. The trilemma of international finance 1/27/2014 Page: 29 GUY SHANI , 2014 - STRATEGY 310 - THE WORLD ECONOMY - SESSION 04 3. The trilemma of international finance Three policy goals Can choose interest rate Can have a stable exchange rate Policy goal: monetary policy independence Difficult to achieve all three simultaneously Policy goal: Financial integration 1/27/2014 Page: 30 Policy goal: Exchange rate stability Easy to move money in and out of the country GUY SHANI , 2014 - STRATEGY 310 - THE WORLD ECONOMY - SESSION 04 15 3. The trilemma of international finance Policy choice: Floating exchange rate Can choose interest ra...
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This note was uploaded on 04/02/2014 for the course STRATEGY 310 taught by Professor Staff during the Winter '08 term at University of Michigan.

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