《宏观经济学教学课件》chapter_20.pptVIP

Introduction Countries are interdependent Booms or recessions in one country spill over to other countries through trade flows Changes in interest rates in any major country cause immediate exchange or interest rate movements in other countries In this chapter we explore the issues of international interdependence further: Mechanisms through which a country with a fixed exchange rate adjusts to balance of payments problems Aspects of behavior of the current flexible exchange rate system Adjustment Under Fixed Exchange Rates Adjustment to a balance-of-payments problem can be achieved in two ways: Change in economic policy Monetary policy Fiscal policy Tariffs Devaluations Automatic adjustment mechanisms Money supply ? spending Unemployment ? wages and prices ? competitiveness The Role of Prices in the Open Economy The real exchange rate is expressed as: (1) ? assume that exchange rate and foreign prices are given How does the openness of the economy affect the aggregate demand curve? An increase in the price level reduces demand Higher price level implies lower real balances, higher interest rates, and reduced spending Given the exchange rate, our goods are more expensive to foreigners and their goods are relatively cheaper for us to buy ? exports decrease and imports increase The Role of Prices in the Open Economy Figure 20-1 shows the downward sloping AD curve where and the NX = 0 curve At point E the home country has a trade deficit To achieve trade balance equilibrium, we would have to Become more competitive (exporting more and importing less) Reduce our level of income in order to reduce import spending The Role of Prices in the Open Economy What should the country do? The central bank could use its reserves to finance temporary imbalances of payments Can borrow foreign currencies abroad May be troublesome if the country’s ability to repay the debt is in question Country must find