ch16.6th Output and the Exchange Rate in the Short Run教程文件.pptVIP

Chapter 16 Output and the Exchange Rate in the Short Run;Introduction;Determinants of Aggregate Demand in an Open Economy;Determinants of Consumption Demand Consumption demand increases as disposable income (i.e., national income less taxes) increases at the aggregate level. The increase in consumption demand is less than the increase in the disposable income because part of the income increase is saved.;Determinants of the Current Account The CA balance is viewed as the demand for a country’s exports (EX) less that countrys own demand for imports (IM). The CA balance is determined by two main factors: The domestic currency’s real exchange rate against foreign currency (q = EP*/P) Domestic disposable income (Yd) ;;There are two effects of a real exchange rate: Volume effect The effect of consumer spending shifts on export and import quantities Value effect It changes the domestic output worth of a given volume of foreign imports. Whether the CA improves or worsens depends on which effect of a real exchange rate change is dominant. We assume that the volume effect of a real exchange rate change always outweighs the value effect. ;How Disposable Income Changes Affect the Current Account An increase in disposable income (Yd) worsens the CA. A rise in Yd causes domestic consumers to increase their spending on all goods.;Determinants of Aggregate Demand in an Open Economy; ;The Real Exchange Rate and Aggregate Demand An increase in q raises CA and D. It makes domestic goods and services cheaper relative to foreign goods and services. It shifts both domestic and foreign spending from foreign goods to domestic goods. A real depreciation of the home currency raises aggregate demand for home output. A real appreciation lowers aggregate demand for home output. ;Real Income and Aggregate Demand A rise in domestic real income raises aggregate demand for home output. A fall in domestic real income lowers aggregate demand for home output.;Figure 16-1: Aggregate Demand as