curve is because the exchange rate does not enter into the LM curve equation o

# Curve is because the exchange rate does not enter

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curve is ________ because the exchange rate does not enter into the LM curve equation o Given the world interest rate, the LM * equation determines ______ _______, regardless of the exchange rate o Diagram on the next page will make these points clearer
12-51 The LM Curve ( LM * ) o Recall the equation for the LM curve o M / P = L ( r * , Y ) LM * o The LM * curve is vertical because the exchange rate does not enter into the LM curve equation o Given the world interest rate, the LM * equation determines aggregate income , regardless of the exchange rate o Diagram on the next page will make these points clearer
12-52 The LM * Curve LM r The _____ ____ equilibrium condition Determine the level of ________ And the ______ _________ ___ LM * Y r = r * Y e
12-53 The LM * Curve LM r The money market equilibrium condition Determine the level of income And the world interest rate LM * Y r = r * Y e
12-54 Goods Market and Money Market Equilibrium Occurs where: o _____* o and o _____ * curves intersect o Note: o In a small open economy (SOE) the interest rate is ____ and the exchange rate can ____
12-55 Goods Market and Money Market Equilibrium Occurs where: o IS * o and o LM * curves intersect o Note: o In a small open economy (SOE) the interest rate is fixed and the exchange rate can vary
12-56 Goods Market and Money Market Equilibrium (The model on a Y - e graph) IS * Y e Y LM *
12-57 Goods Market and Money Market Equilibrium (The model on a Y-e graph) e Y IS * Y Equilibrium Exchange Rate Equilibrium Income LM *
12-58 In Class Questions: Question One Why do we use the * notation in the equations for the IS curve and LM curves respectively (i.e. IS * and LM * ) in the Mundell Fleming model? Question Two What two conditions determine the level of income along the LM * curve?
12-59 In Class Questions: Question One Why do we use the * notation in the equations for the IS curve and LM curves respectively (i.e. IS * and LM * ) in the Mundell Fleming model? Answer - r = r * (See page 12-42 in these notes) Question Two What two conditions determine the level of income along the LM * curve? Money market equilibrium and world interest rate (See page 12-52 in these notes)
12-60 The Mundell-Fleming Model on a Y-r Graph o So far we have seen the model on a ____ graph o Let’s briefly focus on the model on a ___ graph o After this brief discussion of the Y-r graph, we will limit our analysis to a Y-e graph only
12-61 The Mundell-Fleming Model on a Y-r Graph o So far we have seen the model on a Y-e graph o Let’s briefly focus on the model on a Y-r Graph o After this brief discussion of the Y-r graph, we will limit our analysis to a Y-e graph only
12-62 Mundell-Fleming Model on a Y-r Graph o In a small open economy the position of the IS curve depends on the ______ ________ o The _______ _______ adjusts to ensure that the IS curve crosses the point where the LM curve intersects the horizontal line that represents the world interest rate r * o See graph next page o
12-63 Mundell-Fleming Model on a Y-r Graph o In a small open economy the position of the IS curve depends on the exchange rate o The exchange rate adjusts to ensure that the IS curve crosses the point where the LM curve intersects the horizontal line that represents the world interest rate r * o See Graph next page
12-64 Mundell-Fleming Model on a Y-r Graph 12 12 In notes r Y LM IS (e) r = r *
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