LectureOpenEconomyMacroeconomicPolicy(国际经济学(英文)南京理工大学)教案.pptVIP

The Open Economy Multiplier Equilibrium in the Goods Market (*) Y = C + I + G + (X-IM) Demand for goods = C + I + G +(X-IM) Supply of goods = Y Use Y = C + S + T and rearrange (**) S + T + IM = I + G + X (leakage = injection) The Mundell-Fleming Model The IS-LM analysis: allows the interest rate (as well as income) to be determined in the model The MF model is an extension of the IS-LM model to the open economy. The IS Curve Equilibrium in the Goods Market (**) S + T + IM = I + G + X On the LHS, S and IM (and T) are positively related to Y. On the RHS, I is negatively related to the interest rate (i). G, X and T are assumed to be exogenous (independent of i or Y). The IS curve shows the combinations of (Y, i) that provide equilibrium in the goods market. On the IS curve, Y and i are negatively related. A lower interest rate (i) increases I. To restore equilibrium in the goods market, Y must increase so that S and IM increase. Shifts in the IS curve Variables in (**) depend on E and government policy (such as G and T) as well as i and Y. A change in a variable other than i and Y causes a shift in the IS curve. ? Example: An increase in government spending shifts the IS to the _____. An increase in taxes shifts the IS to the _____. Assuming that the Marshall-Lerner condition holds, Depreciation (or devaluation) of the domestic currency shifts the IS to the _____. Equilibrium in the Money Market Money supply (M) Money supply (M) = currency in circulation + demand deposits Monetary base (MB) = currency in circulation + bank reserves M = the money multiplier ?? MB Money demand (L) arises due to transactions, precautionary or assets reasons. It depends positively on real income and negatively on the interest rate. The LM Curve The LM curve shows the combinations of (Y, i) that satisfy the money market equilibrium condition. M/P = L(Y,i): real money supply = real money demand On the LM curve, Y and i are positively rela