islmbp applications to emu economics. islmbp applications to emu economics 1) fixed exchange rates,...
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ISLMBP Applications ISLMBP Applications to EMU Economicsto EMU Economics
ISLMBP Applications to EMU EconomicsISLMBP Applications to EMU Economics
• 1) Fixed Exchange Rates, Fiscal Policy,
Low Capital Mobility
• 2) Fixed Exchange Rates, Fiscal Policy, High Capital Mobility
• 3) Fixed Exchange Rates, Monetary Policy, Low Capital Mobility
• 4) Fixed Exchange Rates, Monetary Policy, High Capital Mobility
• 1) Fixed Exchange Rates, Fiscal Policy,
Low Capital Mobility
• 2) Fixed Exchange Rates, Fiscal Policy, High Capital Mobility
• 3) Fixed Exchange Rates, Monetary Policy, Low Capital Mobility
• 4) Fixed Exchange Rates, Monetary Policy, High Capital Mobility
ISLMBP Applications to EMU EconomicsISLMBP Applications to EMU Economics
• 5) Flexible Exchange Rates, Fiscal Policy, Low Capital Mobility
• 6) Flexible Exchange Rates, Fiscal Policy, High Capital Mobility
• 7) Flexible Exchange Rates, Monetary Policy, High Capital Mobility
• 5) Flexible Exchange Rates, Fiscal Policy, Low Capital Mobility
• 6) Flexible Exchange Rates, Fiscal Policy, High Capital Mobility
• 7) Flexible Exchange Rates, Monetary Policy, High Capital Mobility
O Y
BP
LM1
IS1
r1
Y1
a
1. Fixed exchange rates, Fiscal Policy, Low Capital Mobility 1. Fixed exchange rates, Fiscal Policy, Low Capital Mobility
O
r
Y
BP
LM1
IS1
r1
Y1
An expansionary fiscal policy:An expansionary fiscal policy:
IS2
a
1. Fixed exchange rates, Fiscal Policy, Low Capital Mobility 1. Fixed exchange rates, Fiscal Policy, Low Capital Mobility
a
O
r
Y
BP
LM1
IS1
r1
Y1
An expansionary fiscal policy:An expansionary fiscal policy:BPBP curve steeper than curve steeper than LMLM curve curve
IS2
r2
b
Y2
1. Fixed exchange rates, Fiscal Policy, Low Capital Mobility1. Fixed exchange rates, Fiscal Policy, Low Capital Mobility
O
r
Y
BP
LM1
IS1
r1
Y1
An expansionary fiscal policy:An expansionary fiscal policy:BPBP curve steeper than curve steeper than LMLM curve curve
IS2
a
r2
b
Y2
1. Fixed exchange rates, Fiscal Policy, Low Capital Mobility1. Fixed exchange rates, Fiscal Policy, Low Capital Mobility
O
r
Y
BP
LM1
IS1
r1
Y1
An expansionary fiscal policy:An expansionary fiscal policy:
IS2
a
r2
b
Y2
Restoration of
full equilibrium
LM2
r3
Y3
c
1. Fixed exchange rates, Fiscal Policy, Low Capital Mobility1. Fixed exchange rates, Fiscal Policy, Low Capital Mobility
2. Fixed exchange rates, Fiscal Policy, High Capital Mobility2. Fixed exchange rates, Fiscal Policy, High Capital Mobility
O
Y
BP
LM
IS
r1
Y1
a
O
Y
BP
LM1
IS1
r1
Y1
An expansionary fiscal policyAn expansionary fiscal policy
IS2
a
r2
Y2
b
2. Fixed exchange rates, Fiscal Policy, High Capital Mobility2. Fixed exchange rates, Fiscal Policy, High Capital Mobility
O
r
Y
BP
LM1
IS1
a
r1
Y1
IS2
r2
b
Y2
2. Fixed exchange rates, Fiscal Policy, High Capital Mobility2. Fixed exchange rates, Fiscal Policy, High Capital Mobility
O
r
Y
BP
LM1
IS1
ar1
Y1
IS2
r2
b
Y2
Restoration of
full equilibrium
LM2
r3
Y3
c
2. Fixed exchange rates, Fiscal Policy, High Capital Mobility2. Fixed exchange rates, Fiscal Policy, High Capital Mobility
O
r
Y
BP
LM1
IS
ar1
Y1
An expansionary monetary policyAn expansionary monetary policy
3. Fixed exchange rates, Monetary Policy, High Capital Mobility 3. Fixed exchange rates, Monetary Policy, High Capital Mobility
O
r
Y
BP
LM1
IS
ar1
Y1
An expansionary monetary policyAn expansionary monetary policy
LM2
Y2
r2
b
3. Fixed exchange rates, Monetary Policy, High Capital Mobility 3. Fixed exchange rates, Monetary Policy, High Capital Mobility
O
r
Y
BP
LM1
IS
ar1
Y1
An expansionary monetary policyAn expansionary monetary policy
Y2
LM2
r2
b
3. Fixed exchange rates, Monetary Policy, High Capital Mobility 3. Fixed exchange rates, Monetary Policy, High Capital Mobility
O
r
Y
BP
LM1
IS
ar1
Y1
An expansionary monetary policyAn expansionary monetary policy
Y2
LM2
r2
bFull equilibrium
is restoredback at point a
ISLMBP analysis: fixed exchange ratesISLMBP analysis: fixed exchange rates
• Analysis under free-floating rates
– effects of exchange rate changes on the BP curve
• Analysis under free-floating rates
– effects of exchange rate changes on the BP curve
THE OPEN ECONOMY AND ISLM ANALYSISTHE OPEN ECONOMY AND ISLM ANALYSIS
O
r
Y
BP
SURPLUS
Movements in the BP curveMovements in the BP curve
Appreciation
O
r
Y
BP
DEFICIT
Depreciation
Movements in the BP curveMovements in the BP curve
O
r
Y
BP
LM
IS1
Y1
An expansionary fiscal policyAn expansionary fiscal policy
IS2
Y2
r1
r2
b
a
ISLMBP analysis: floating exchange ratesISLMBP analysis: floating exchange rates
O
r
Y
BP
LM
IS1
Y1
An expansionary fiscal policyAn expansionary fiscal policy
IS2
a
Y2
r1
r2
b
ISLMBP analysis: floating exchange ratesISLMBP analysis: floating exchange rates
O
r
Y
BP
LM
IS1
Y1
An expansionary fiscal policyAn expansionary fiscal policy
IS2
a
Y2
r1
r2
b
ISLMBP analysis: floating exchange ratesISLMBP analysis: floating exchange rates
O
r
Y
BP1
LM
IS1
Y1
An expansionary fiscal policyAn expansionary fiscal policy
IS2
a
Y2
r1
r2
b
Full equilibrium isrestored at point c
BP2
IS3
Y3
r3
c
ISLMBP analysis: floating exchange ratesISLMBP analysis: floating exchange rates
O
r
Y
LM
BP1
IS1
Y1
An expansionary fiscal policy:An expansionary fiscal policy:BPBP curve steeper than curve steeper than LMLM curve curve
ar1
IS2
Y2
r2b
ISLMBP analysis: floating exchange ratesISLMBP analysis: floating exchange rates
O
r
Y
LM
BP1
IS1
Y1
An expansionary fiscal policy:An expansionary fiscal policy:BPBP curve steeper than curve steeper than LMLM curve curve
a
Y2
r1
r2b
IS2
ISLMBP analysis: floating exchange ratesISLMBP analysis: floating exchange rates
O
r
Y
LM
BP1
IS1
Y1
An expansionary fiscal policy:An expansionary fiscal policy:BPBP curve steeper than curve steeper than LMLM curve curve
a
Y2
r1
r2b
IS2
ISLMBP analysis: floating exchange ratesISLMBP analysis: floating exchange rates
O
r
Y
LM
BP1
IS1
Y1
An expansionary fiscal policy:An expansionary fiscal policy:BPBP curve steeper than curve steeper than LMLM curve curve
IS3
a
Y2
r1
r2b
BP2
IS2
Y3
r3c
Full equilibrium isachieved at point c
ISLMBP analysis: floating exchange ratesISLMBP analysis: floating exchange rates
O
r
Y
LM1
IS1
Y1
An expansionary monetary policyAn expansionary monetary policy
a
Y2
r1
r2
BP1
LM2
b
ISLMBP analysis: floating exchange ratesISLMBP analysis: floating exchange rates
O
r
Y
LM1
IS1
Y1
An expansionary monetary policyAn expansionary monetary policy
a
Y2
r1
r2 b
The balance of paymentsdeficit causes the BP line
to shift downward
BP1
LM2
ISLMBP analysis: floating exchange ratesISLMBP analysis: floating exchange rates
O
r
Y
LM1
IS1
Y1
An expansionary monetary policyAn expansionary monetary policy
a
Y2
r1
r2 b
The depreciationcauses the IS curveto shift to the right
BP1
LM2
ISLMBP analysis: floating exchange ratesISLMBP analysis: floating exchange rates
O
r
Y
BP2
LM1
IS1
Y1
An expansionary monetary policyAn expansionary monetary policy
a
Y2
r1
r2 b Full equilibrium isrestored at point c
BP1
IS2
Y3
r3
LM2
c
ISLMBP analysis: floating exchange ratesISLMBP analysis: floating exchange rates