The adjustment through the goods market ie private

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The adjustment through the goods market (i.e private surplus(S(y,r)-I(r)) (or deficits) not being matched by injections (or leakages) causes an increase in r and the mismatch is eliminated) prevents a steep decrease in r (i.e. r r 2 and r 2 > r 1 ) Ozan Hatipoglu (Department of Economics) Open Economy Macroeconomics Spring 2018 165 / 1
Summary of Monetary Policy Final Effects An increase in M s Ozan Hatipoglu (Department of Economics) Open Economy Macroeconomics Spring 2018 166 / 1
Summary of Monetary Policy Final Effects An increase in M s a depreciation of the currency Ozan Hatipoglu (Department of Economics) Open Economy Macroeconomics Spring 2018 166 / 1
Summary of Monetary Policy Final Effects An increase in M s a depreciation of the currency increase in real income Ozan Hatipoglu (Department of Economics) Open Economy Macroeconomics Spring 2018 166 / 1
Summary of Monetary Policy Final Effects An increase in M s a depreciation of the currency increase in real income decrease in domestic interest rates assuming capital is not perfectly mobile Ozan Hatipoglu (Department of Economics) Open Economy Macroeconomics Spring 2018 166 / 1
Summary of Monetary Policy Final Effects An increase in M s a depreciation of the currency increase in real income decrease in domestic interest rates assuming capital is not perfectly mobile improvement in current account and a deterioration in capital account, no effect on BOP eq. Ozan Hatipoglu (Department of Economics) Open Economy Macroeconomics Spring 2018 166 / 1
Summary of Monetary Policy Final Effects An increase in M s a depreciation of the currency increase in real income decrease in domestic interest rates assuming capital is not perfectly mobile improvement in current account and a deterioration in capital account, no effect on BOP eq. How about the effects of monetary policy if there is perfect capital mobility? Ozan Hatipoglu (Department of Economics) Open Economy Macroeconomics Spring 2018 166 / 1
Fiscal Expansion with floating rates r S 0 S FF(y 0 ) r 0 A r y 0 y IS(S 0 ) LM(M 0 ) y S 0 S A CA Eq: B(y,s) =0 r y 0 y 45 0 line y 0 y 0 BP(S 0 ) Ozan Hatipoglu (Department of Economics) Open Economy Macroeconomics Spring 2018 167 / 1
Fiscal Expansion with floating rates r S 0 S FF(y 0 ) r 0 A r y 0 y IS(G 0, S 0 ) LM(M 0 ) y S 0 S A CA Eq: B(y,s) =0 r y 0 y 45 0 line y 0 y 0 BP(S 0 ) IS(G 1, S 0 ) r 1 B FF(y 1 ) y 1 Ozan Hatipoglu (Department of Economics) Open Economy Macroeconomics Spring 2018 168 / 1
Fiscal Expansion with floating rates r S 0 S FF(y 0 ) r 0 A r y 0 y IS(G 0, S 0 ) LM(M 0 ) y 2 y S 0 S A CA Eq: B(y,s) =0 r y 0 y 45 0 line y 0 y 0 BP(S 0 ) IS(G 1, S 0 ) r 1 IS(G 1, S 1 ) BP(S 1 ) S 1 B FF(y 1 ) B y 2 S 1 r 2 y 1 y 2 Ozan Hatipoglu (Department of Economics) Open Economy Macroeconomics Spring 2018 169 / 1
Summary of Fiscal Policy Intermediate Effects An increase in G Ozan Hatipoglu (Department of Economics) Open Economy Macroeconomics Spring 2018 170 / 1
Summary of Fiscal Policy Intermediate Effects An increase in G IS shifts right, since AS is flat, real income y . To have money market eq. r has to increase since money supply is fixed. r has to increase due to higher equilibrium borrowing requirement of the government.

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