macroeconomic policies in an open economy frederick university 2013
TRANSCRIPT
![Page 1: Macroeconomic policies in an open economy Frederick University 2013](https://reader036.vdocument.in/reader036/viewer/2022083009/5697bfc01a28abf838ca3a4e/html5/thumbnails/1.jpg)
Macroeconomic policies in an open economy
Frederick University
2013
![Page 2: Macroeconomic policies in an open economy Frederick University 2013](https://reader036.vdocument.in/reader036/viewer/2022083009/5697bfc01a28abf838ca3a4e/html5/thumbnails/2.jpg)
Fixed exchange rate and full capital mobility
Fiscal expansion
i
Y
IS
LM
IS’
LM shifts rightwards until the reason for foreign exchange inflows is eliminated
LM’A new equilibrium is achieved at the same i,and higher Y
Conclusion: under a fixed exchange rate and full capital mobility,Fiscal policy is effective
i rises. Foreign currency inflowsThe Central Bank buys currency to support the fixed exchange rateMS increases
![Page 3: Macroeconomic policies in an open economy Frederick University 2013](https://reader036.vdocument.in/reader036/viewer/2022083009/5697bfc01a28abf838ca3a4e/html5/thumbnails/3.jpg)
Fixed exchange rate and full capital mobility
Monetary expansion
i
Y
IS
LM
LM’
i fallsForeign currency outflowsThe Central Bank sells currencyMS falls
LM shifts leftwards
Conclusion: under a fixed exchange rate and full capital mobility,Monetary policy is not effective
![Page 4: Macroeconomic policies in an open economy Frederick University 2013](https://reader036.vdocument.in/reader036/viewer/2022083009/5697bfc01a28abf838ca3a4e/html5/thumbnails/4.jpg)
Fixed exchange rate and full capital immobility
Fiscal expansion
i
Y
IS
LM
IS’
LM’The new equilibrium is achieved at the initial income level but at a higher interest rate
Conclusion: under a fixed exchange rate and full capital immobility,Fiscal policy is ineffective
Y increases. Imports (M) increase and the public needs more currencyThe Central Bank sells currencyMS falls
LM shifts leftwards until the reason for the change is eliminated
![Page 5: Macroeconomic policies in an open economy Frederick University 2013](https://reader036.vdocument.in/reader036/viewer/2022083009/5697bfc01a28abf838ca3a4e/html5/thumbnails/5.jpg)
Fixed exchange rate and full capital immobility
Monetary expansion
i
Y
IS
LMLM’
LM shifts leftwards
Y risesM increaseThe Central Bank sells currencyMS falls
Conclusion: under a fixed exchange rate and full capital immobility,Monetary policy is ineffective
![Page 6: Macroeconomic policies in an open economy Frederick University 2013](https://reader036.vdocument.in/reader036/viewer/2022083009/5697bfc01a28abf838ca3a4e/html5/thumbnails/6.jpg)
Floating exchange rate and full capital mobility
Fiscal expansion
i
Y
IS
LM
i rises and foreign capital inflowsForeign currency supply rises and local currency becomes more expensiveImports (M) increase and exports (X) fall
IS shifts leftwards
Conclusion: under a floating exchange rate and full capital mobility,Fiscal policy is ineffective
![Page 7: Macroeconomic policies in an open economy Frederick University 2013](https://reader036.vdocument.in/reader036/viewer/2022083009/5697bfc01a28abf838ca3a4e/html5/thumbnails/7.jpg)
Floating exchange rate and full capital mobility
Monetary expansion
i
Y
IS
LM LM’
IS’
i falls and currency outflows.Local currency becomes cheaperM fall and X increase
IS shifts rightwards
Conclusion: under a floating exchange rate and full capital mobility,Monetary policy is effective
![Page 8: Macroeconomic policies in an open economy Frederick University 2013](https://reader036.vdocument.in/reader036/viewer/2022083009/5697bfc01a28abf838ca3a4e/html5/thumbnails/8.jpg)
Floating exchange rate and full capital immobility
Fiscal expansion
i
Y
IS
LM
IS’
IS’’Income rises and M increaseDemand for foreign currency increasesForeign currency becomes more expensive and M fall and X rise
IS shifts rightwards
Conclusion: under a floating exchange rate and full capital immobility,Fiscal expansion leads to greater income and higher interest rate
![Page 9: Macroeconomic policies in an open economy Frederick University 2013](https://reader036.vdocument.in/reader036/viewer/2022083009/5697bfc01a28abf838ca3a4e/html5/thumbnails/9.jpg)
Floating exchange rate and full capital immobility
Monetary expansion
i
Y
IS
LMLM’
IS’
Income rises and M increasesThe demand for currency risesForeign currency becomes more expensiveExports increase and imports fall
IS shifts rightwards
Conclusion: under a floating exchange rate and full capital immobility,Monetary policy is effective