Chapter 16 Output and the Exchange Rate in the Short Run 国际财务相关管理课件.pptVIP

Problem P468 4,10,13 16-6 Short-Run Equilibrium for an Open Economy: Putting the DD and AA Schedules Together A short-run equilibrium for the economy as a whole must bring equilibrium simultaneously in the output and asset markets. That is, it must lie on both DD and AA schedules. Figure 16-8: Short-Run Equilibrium: The Intersection of DD and AA(P449) Output, Y Exchange Rate, E AA Y1 E1 1 DD Figure 16-9: How the Economy Reaches Its Short-Run Equilibrium(P450) AA Y1 E1 1 DD 3 E3 2 E2 Output, Y Exchange Rate, E 16-7 Temporary Changes in Monetary and Fiscal Policy Two types of government policy: Monetary policy It works through changes in the money supply. Fiscal policy It works through changes in government spending or taxes. Temporary policy shifts are those that the public expects to be reversed in the near future and do not affect the long-run expected exchange rate. Assume that policy shifts do not influence the foreign interest rate and the foreign price level. Monetary Policy An increase in money supply (i.e., expansionary monetary policy) raises the economy’s output. The increase in money supply creates an excess supply of money, which lowers the home interest rate. As a result, the domestic currency must depreciate (i.e., home products become cheaper relative to foreign products) and aggregate demand increases. DD Figure 16-10: Effects of a Temporary Increase in the Money Supply(P452) Output, Y Exchange Rate, E AA2 Y2 E2 2 AA1 1 E1 Y1 Fiscal Policy An increase in government spending, a cut in taxes, or some combination of the two (i.e, expansionary fiscal policy) raises output. The increase in output raises the transactions demand for real money holdings, which in turn increases the home interest rate. As a result, the domestic currency must appreciate. DD1 Figure 16-11: Effects of a Temporary Fiscal Expansion(P453) Output, Y Exchange Rate, E AA DD2 Y1 E1 1 2 Y2 E2 Policies to Maintain Full Employment