The Mundell Fleming Model. The Mundell Fleming Model is a simple open economy version of the IS LM model.
|
|
- Lindsey Shepherd
- 5 years ago
- Views:
Transcription
1 International Finance Lecture 4 Autumn 2011 The Mundell Fleming Model The Mundell Fleming Model is a simple open economy version of the IS LM model. I. The Model A. The goods market Goods market equilibrium in the IS LM model is characterised graphically by the IS curve. In this section I derive an open economy version of the IS curve. I assume that there is a single home good and a single good produced by the rest of the world. The home currency price of the home good is denoted by P and the foreign currency price of the foreign good is denoted by P*. I assume that both of the prices are constant and, as we can pick the units that the home and foreign goods are measured in, we can assume that both are equal to one. I will denote the exchange rate by e and interpret it as the home currency price of foreign currency. This is how it is usually defined in the economics literature. This means that we have: Floating exchange rate Fixed exchange rate e goes up depreciation devaluation e goes down appreciation revaluation a. The national accounting identity and the law of one price The national accounting identity for an open economy is (1) Y = C + I + G + X, Where X is net exports, or exports minus imports. In the closed economy version with a fixed price, P, normalised to one, it did not matter whether we thought of the variables as being measured in units of the good or in the home currency value of the good. Here we will be explicit and say that it is measured in units of the home good. I assume that the Law of One Price holds. The Law of One Price The law of one price says that goods should cost the same amount, whether you buy them in home currency or convert the home currency into foreign currency and buy them with foreign currency. As an example, if a sweater sells for 100 at Harrods and the pound is worth two dollars, then the same sweater at Saks Fifth Avenue should cost $200. Of course trade restrictions and transportation costs mean that this is not always true so the law is more of a rule of thumb. More generally, we can express the law of one price at p = ep*, where p is the home currency price of a good, e is the exchange rate, expressed as the homecurrency price of foreign currency and p* is the foreign currency price of a good.
2 b. net exports The value of net exports in terms of home currency is equal to the value of exports in terms of home currency minus the value of imports in terms of home currency. The value of exports in terms of home currency is equal to P times the volume of exports. The value of imports in terms of home currency is equal to the home currency price of the foreign good multiplied by the volume of imports. By the law of one price the home currency price of the foreign good is equal to the exchange rate times the foreign currency price. Thus, the value of imports in terms of home currency is ep* times the volume of imports. So, dividing through by P, we have that the volume of net exports (X) is equal to the volume of exports minus (ep*/p) times the volume of imports. Since P = P* = 1 we have that X = volume of exports e x volume of imports. We can also interpret X as X = foreign demand for home goods e x home demand for foreign goods. I assume that X is a function of Y and e. I further assume that the foreign demand for home goods is not a function of Y and that an increase in Y increases the home demand for foreign goods. Thus, X is a decreasing function of Y. We have that ep*/p = e is the relative price of foreign goods in terms of home goods. Thus an increase in e (a depreciation or devaluation) causes the foreign demand for home goods to go up and the home demand for foreign goods to go down. However, it does not necessarily cause e times the home demand for foreign goods to go down. This depends on the elasticity of demand for foreign goods with respect to the price. So it is not clear if X goes up or down. This ambiguity led to a huge literature that tested whether devaluation causes net exports to go up or down. The conclusion was that in the very short run demand does not respond much to devaluation and the direct effect of the change in the exchange rate dominates: devaluation worsens the trade balance. However, after some time, demand responds sufficiently that the trade balance improves. This phenomenon is called a J Curve. I assume here that an increase in e improves the trade balance. Thus we have: (2) X = X(Y,e), X Y < 0, X e > 0. c. equilibrium in the goods market Substituting (2) and the assumptions I made about C and I in the last lecture into equation (1) yields (3) Y = C(Y) + I(r) + G + X(Y,e). I will continue to graph this with Y on the horizontal axis and r on the vertical axis. Given G, we will have a different IS curve for every value of e. An expansionary fiscal policy (an increase in G) shifted the IS curve out. So, an increase in e (since it increases X) also shifts the IS curve out. B. The money market
3 Only domestic residents hold money and home residents do not hold foreign money. Thus the condition for money market equilibrium is the same as in the previous lecture. The LM curve has the same properties as in Lecture 3. C. Uncovered interest parity Denote the world interest rate by r*. It is assumed that the home country is small in the sense that it takes the world interest rate as given. Both home and foreign investors hold home and foreign bonds. I assume that they care solely about their expected return from holding these bonds. An investor can take one unit of home money and invest in a home bond. At the end of the period he gets 1 + r units of home money. Alternatively, he can take one unit of home money, exchange it for 1/e units of foreign money and invest it in a foreign bond. At the end of the period he will have (1 + r*)/e units of foreign money. He can exchange this for (1 + r*)(e /e) units of home money, where e is the end of period exchange rate. I assume that investors have myopic, or adaptive, expectations. They expect that the end of period exchange rate will be the same as the current exchange rate. Thus their expectation of e is that it equals e and they expect they will get 1 + r* units of home currency if they invest in home bonds. Thus, for investors to be willing to hold both home and foreign bonds it must be true that 1 + r = 1 + r*, or that r = r*. Graphically we have: If the home interest rate is greater than the world interest rate, all investors would want to hold only home bonds and all of the world s capital would be on the verge of flowing into the home country: a balance of payments surplus. If home interest rate is less than the foreign interest rate then no investor would want to hold home bonds and all of the capital in the home country would be on the verge of flowing out: a balance of payments deficit. II. Floating Exchange Rates
4 A. Equilibrium with floating exchange rates When the exchange rate floats we want to find the combination (Y,r,e) such that the goods market clears (equation (3)), the money market clears (4) M = L(Y,r) and there is balance of payments equilibrium: (5) r = r*. That is, we want to find a value of e such that all three curves (the IS curve, the LM curve and the BP curve) intersect. If there were just two curves it is easy to see how they would intersect, but how do we get all three to intersect? Suppose that they do not: In the above picture, the intersection of the IS and LM curves occurs at an interest rate that is greater than the world interest rate: r > r*. I assume that the exchange rate adjusts to keep r = r*. I assume: If r > r* (there is a balance of payments surplus), e (the exchange rate appreciates) If r < r* (there is a balance of payments deficit), e (the exchange rate depreciates). We have that e (the exchange rate depreciates) implies the IS curve shifts in. e (the exchange rate appreciates) implies the IS curve shifts out. So, the exchange rate changes in the way that causes the IS curve to shift so that it intersects with the other two curves. In the above case the exchange rate depreciates and the IS curve shifts in to intersect with the LM and BP curves.
5 B. Monetary policy with floating exchange rates The only curve that depends on M is the LM curve. An expansionary monetary policy (an increase in M) shifts the LM curve out. This is seen to the right. The new intersection of the IS and LM curves is at an r < r*. Thus we are in the region of balance of payments deficit and the exchange rate depreciates. This causes the IS curve to shift out until it intersects with the new LM curve and the BP curve. This is seen in the figure below. Thus, an expansionary monetary policy causes output to go up, the exchange rate to depreciate and the interest rate to remain unchanged. Consumption goes up because output goes up and investment is unchanged because the interest rate is unchanged. What happens to net exports? The increase in output tends to decrease net exports and the depreciation tends to increase net exports. However we have that Y C = I + G + X. Both Y and C go up, but because the marginal propensity to consume is less than one we have that Y C goes up. So, I + G + X must go up. I and G are unchanged, so X must go up. The story can be told in words. An expansionary monetary policy causes excess supply in the money market and the interest rate declines to clear the money market. The decline in the interest rate
6 leads to a balance of payments deficit and the exchange rate depreciates to restore balance of payments equilibrium. The depreciation of the exchange rate causes net exports to rise and output must rise to restore goods market equilibrium. C. Fiscal policy with floating exchange rates An expansionary fiscal policy is an increase in G. The only curve that depends on G is the IS curve and it shifts out. This is seen in the figure below. The intersection of the LM and new IS curve is now in the region of balance of payments surplus and the exchange rate appreciates, shifting the IS curve back to its original position. Thus, an expansionary monetary policy with a floating exchange rate is ineffective. Both the interest rate and output are unchanged. Thus, consumption and investment are unchanged. If output, consumption and investment are unchanged and government spending goes up, then by equation (1), net exports must go down by the amount that government spending goes up. An expansionary fiscal policy has no effect on output: the government spending just crowds out net exports. III. Fixed Exchange Rates A. Equilibrium with fixed exchange rates Suppose that the government pegs the exchange rate at e. Suppose as before that the three curves did not intersect. This is seen in the figure below. In this figure, the intersection of the IS and LM curves occurs at an interest rate that is greater than the world interest rate: r > r*. As before, if the government does not act, the exchange rate will appreciate. To keep the exchange rate from appreciating the central bank intervenes in the foreign exchange market, selling home currency and buying foreign currency. This causes the home money supply to expand and the LM curve shifts out until the three curves intersect.
7 We have the following rules: If r > r* the central bank intervenes, selling home money and buying foreign money. Thus, M and the LM curve shifts out. If r < r* the central bank intervenes, buying home money and selling foreign money. Thus, M and the LM curve shifts in. With floating exchange rates the exchange rate adjusts so that the IS curve moves so that all three curves intersect. With fixed exchange rates the money supply adjusts so that the LM curve moves so that all three curves intersect. B. Monetary policy with fixed exchange rates The only curve that depends on M is the LM curve. An expansionary monetary policy (an increase in M) shifts the LM curve out. This is seen to the right. This is seen below.the new intersection of the IS and LM curves is at an r < r*. Thus we are in the region of balance of payments deficit and the central bank must intervene to keep the exchange rate from depreciating. This causes the LM curve to shift back to its original position. This is seen in the figure below. Output is unchanged. The only thing that happens is reserves
8 fall. If the government runs out of reserves doing this then it can no longer maintain the fixed exchange rate. This is a fundamental result in international finance. A country with internationally mobile capital and a fixed exchange rate cannot follow an independent monetary policy. This is clear from equations (3) (5). We have three equations to solve, so there must be three endogenous variables. If e is fixed, then one of the variables that was exogenous in the floating case must be endogenous in the fixed regime. G cannot adjust as quickly as M so it is natural to think of M as the new endogenous variable. C. Fiscal Policy with Fixed Exchange Rates An expansionary fiscal policy is an increase in G. Only the IS curve is affected by a change in G and it shifts out as seen below: : The new intersection of the IS and LM curves is in the region of balance of payments surplus. According to our rule, this causes the central bank to intervene by buying reserves and selling its own currency. This causes the LM curve to shift out. The outcome is that Y goes up, r is unchanged, C goes up, I is unchanged, and reserves rise. Because Y goes up, X goes down.
9 D. Devaluation with Fixed Exchange Rates Suppose that the central bank increases (devalues) the fixed exchange rate. By equations (3) (5), we know only the IS curve is affected. The IS curve shifts out as seen below: The new intersection of the IS and LM curves is in the region of balance of payments surplus. According to our rule, this causes the central bank to intervene by buying reserves and selling its own currency. This causes the LM curve to shift out. The outcome is that Y goes up, r is unchanged, C goes up, I is unchanged, and reserves rise. Because Y goes up and I is unchanged, X goes up. (See equation (3))
Exercise 3 Short Run Determination of Output, the Interest Rate, the Exchange Rate and the Current Account in a Mundell Fleming Model
Fletcher School, Tufts University Exercise 3 Short Run Determination of Output, the Interest Rate, the Exchange Rate and the Current Account in a Mundell Fleming Model E212 Macroeconomics Prof. George
More informationTopic 7: The Mundell-Fleming Model
Topic 7: The Mundell-Fleming Model Read: Ch.18.3-18.6. Outline: 1. Introduction. 2. The IS-LM-BP equilibrium. 3. Floating exchange rates 4. Fixed exchange rates. 5. The case of imperfect capital mobility
More informationYORK UNIVERSITY. Suggested Solutions to Part C (C3(d) and C4)
Page 1 of 5 Pages YORK UNIVERSITY Atkinson College Department of Economics ECON 2450 - Midterm Examination July 13, 2006 Suggested Solutions to Part C (C3(d) and C4) C3 (d). Derive and graph an equation
More informationdr Bartłomiej Rokicki Chair of Macroeconomics and International Trade Theory Faculty of Economic Sciences, University of Warsaw
Chair of Macroeconomics and International Trade Theory Faculty of Economic Sciences, University of Warsaw Main assumptions of the model Small open economy Short term analysis constant prices and wages
More informationfile:///c:/users/moha/desktop/mac8e/new folder (13)/CourseComp...
file:///c:/users/moha/desktop/mac8e/new folder (13)/CourseComp... COURSES > BA121 > CONTROL PANEL > POOL MANAGER > POOL CANVAS Add, modify, and remove questions. Select a question type from the Add drop-down
More informationPart B (Long Questions)
Part B (Long Questions) Question B.1: Mundell-Fleming Model with Flexible Exchange Rates Suppose that a small open economy can be represented by the following model with a flexible exchange rate: C d =
More information14.05 Intermediate Applied Macroeconomics Problem Set 5
14.05 Intermediate Applied Macroeconomics Problem Set 5 Distributed: November 15, 2005 Due: November 22, 2005 TA: Jose Tessada Frantisek Ricka 1. Rational exchange rate expectations and overshooting The
More informationFinal Term Papers. Fall 2009 (Session 03) ECO401. (Group is not responsible for any solved content) Subscribe to VU SMS Alert Service
Fall 2009 (Session 03) ECO401 (Group is not responsible for any solved content) Subscribe to VU SMS Alert Service To Join Simply send following detail to bilal.zaheem@gmail.com Full Name Master Program
More informationFETP/MPP8/Macroeconomics/Riedel. General Equilibrium in the Short Run
FETP/MPP8/Macroeconomics/Riedel General Equilibrium in the Short Run Determinants of aggregate demand in the short run A short-run model of output markets A short-run model of asset markets A short-run
More informationInternational Economics. Unit 3 Macroeconomic Policy in an Open Economy. Mundell-Fleming model
International Economics Unit 3 Macroeconomic Policy in an pen Economy. Mundell-Fleming model 1 Previous conclusion The ultimate effects of a devaluation are in large part dependent upon the economic policies
More informationIntermediate Macroeconomics-ECO 3203
Intermediate Macroeconomics-ECO 3203 Homework 3 Solution, Summer 2017 Instructor, Yun Wang Instructions: The full points of this homework exercise is 100. Show all your works (necessary steps to get the
More informationPrint last name: Given name: Student number: Section number
Department of Economics University of Toronto at Mississauga ECO202Y5Y Macroeconomic Theory and Policy December 2002 Test Two Instructor: X. Gu Date: Friday, December 6, 2002 Time allowed: Two hours Aids
More informationOpen Economy Macroeconomics, Aalto Universtiy SB, Spring 2016, Solution to Problem Set 4
Open Economy Macroeconomics, Aalto Universtiy SB, Spring 2016, Solution to Problem Set 4 Jouko Vilmunen Monday, 4 April 2016 Exercise 1 (Poole) The way we normally draw the LM-curve assumes that the central
More informationUNIVERSITY OF TORONTO Faculty of Arts and Science. April Examination 2016 ECO 209Y. Duration: 2 hours
UNIVERSITY OF TORONTO Faculty of Arts and Science April Examination 2016 ECO 209Y Duration: 2 hours Examination Aids allowed: Non-programmable calculators only LAST NAME FIRST NAME STUDENT NUMBER DO NOT
More informationUniversity of Toronto July 21, 2010 ECO 209Y L0101 MACROECONOMIC THEORY. Term Test #2
Department of Economics Prof. Gustavo Indart University of Toronto July 21, 2010 SOLUTIONS ECO 209Y L0101 MACROECONOMIC THEORY Term Test #2 LAST NAME FIRST NAME STUDENT NUMBER INSTRUCTIONS: 1. The total
More informationKeynesian Theory (IS-LM Model): how GDP and interest rates are determined in Short Run with Sticky Prices.
Keynesian Theory (IS-LM Model): how GDP and interest rates are determined in Short Run with Sticky Prices. Historical background: The Keynesian Theory was proposed to show what could be done to shorten
More informationECON 2123 Review Question 3
ECON 2123 Review Question 3 TA: Mr. Ding Dong May 6, 2018 1 Open Economy Macroeconomics Question 1: Japan produces and exports only cameras, and Saudi Arabia, produces and exports only barrels of oil.
More informationProfessor Christina Romer SUGGESTED ANSWERS TO PROBLEM SET 5
Economics 2 Spring 2017 Professor Christina Romer Professor David Romer SUGGESTED ANSWERS TO PROBLEM SET 5 1. The tool we use to analyze the determination of the normal real interest rate and normal investment
More informationMonetary Macroeconomics Lecture 5. Mark Hayes
Diploma Macro Paper 2 Monetary Macroeconomics Lecture 5 Aggregate demand: external trade Mark Hayes slide 1 Exogenous: M, G, T, i, π e Goods market KX and IS (Y, C, I) Money market (LM) (i, Y) Labour market
More information1 Question 1. Professor Christiano Economics 311, Winter 2005 Solution to Midterm #1
Professor Christiano Economics 311, Winter 2005 Solution to Midterm #1 1 Question 1 (a) (2) The internal rate of return of a project is the ratio of the net increase in revenues it is expected to generate
More informationForeign Trade and the Exchange Rate
Foreign Trade and the Exchange Rate Chapter 12 slide 0 Outline Foreign trade and aggregate demand The exchange rate The determinants of net exports A A model of the real exchange rates The IS curve and
More informationFinal Term Papers. Fall 2009 (Session 03a) ECO401. (Group is not responsible for any solved content) Subscribe to VU SMS Alert Service
Fall 2009 (Session 03a) ECO401 (Group is not responsible for any solved content) Subscribe to VU SMS Alert Service To Join Simply send following detail to bilal.zaheem@gmail.com Full Name Master Program
More informationFinal Exam - Answers April 26, 2004
Page 1 of 9 Final Exam - Answers April 26, 2004 Answer all questions, on these sheets in the spaces provided (use the blank space on page 9 if you need more). In questions where it is appropriate, show
More informationLecture 5: Flexible prices - the monetary model of the exchange rate. Lecture 6: Fixed-prices - the Mundell- Fleming model
Lectures 5-6 Lecture 5: Flexible prices - the monetary model of the exchange rate Lecture 6: Fixed-prices - the Mundell- Fleming model Chapters 5 and 6 in Copeland IS-LM revision Exchange rates and Money
More informationChapter 22 THE MUNDELL-FLEMING MODEL WITH PARTIAL INTERNATIONAL CAPITAL MOBILITY
Chapter 22 THE MUNDELL-FLEMING MODEL WITH PARTIAL INTERNATIONAL CAPITAL MOBILITY This chapter extends the Keynesian model to allow for international trade in assets in the context of fixed exchange rates
More informationCHAPTER 17 (7e) 1. Using the information in this chapter, label each of the following statements true, false, or uncertain. Explain briefly.
Self-practice (Open Economy) Ch 17(7e): Q1, Q2, Q5 Ch 18(7e): Q1, Q2, Q5, Q7, Ch 20(6e): Q1-Q5 CHAPTER 17 (7e) 1. Using the information in this chapter, label each of the following statements true, false,
More informationTOPIC 9. International Economics
TOPIC 9 International Economics 2 Goals of Topic 9 What is the exchange rate? NX back!! What is the link between the exchange rate and net exports? What is the trade deficit? How do different shocks affect
More informationSimple Notes on the ISLM Model (The Mundell-Fleming Model)
Simple Notes on the ISLM Model (The Mundell-Fleming Model) This is a model that describes the dynamics of economies in the short run. It has million of critiques, and rightfully so. However, even though
More informationKOÇ UNIVERSITY ECON 202 Macroeconomics Fall Problem Set VI C = (Y T) I = 380 G = 400 T = 0.20Y Y = C + I + G.
KOÇ UNIVERSITY ECON 202 Macroeconomics Fall 2007 Problem Set VI 1. Consider the following model of an economy: C = 20 + 0.75(Y T) I = 380 G = 400 T = 0.20Y Y = C + I + G. (a) What is the value of the MPC
More informationThe Impact of an Increase In The Money Supply and Government Spending In The UK Economy
The Impact of an Increase In The Money Supply and Government Spending In The UK Economy 1/11/2016 Abstract The international economic medium has evolved in the direction of financial integration. In the
More information14.02 Principles of Macroeconomics Problem Set # 2, Answers
14.0 Principles of Macroeconomics Problem Set #, Answers Part I 1. False. The multiplier is 1/ [1- c 1 (1- t)]. The effect of an increase in autonomous spending is dampened because taxes respond proportionally
More informationEconomics Final Examination December, Part A: Multiple Choice. Choose the best alternative that answer or completes the sentence.
Economics 243-01 Final Examination December, 2000 Instructions: Put your name, social security number and your seat number on the blue book provided. Put all your answers in the blue book provided. Turn
More informationGehrke: Macroeconomics Winter term 2012/13. Exercises
Gehrke: 320.120 Macroeconomics Winter term 2012/13 Questions #1 (National accounts) Exercises 1.1 What are the differences between the nominal gross domestic product and the real net national income? 1.2
More informationUniversity of Toronto December 3, 2010 ECO 209Y MACROECONOMIC THEORY AND POLICY. Term Test #2 L0101 L0301 L0401 M 2-4 W 2-4 R 2-4
Department of Economics Prof. Gustavo Indart University of Toronto December 3, 2010 ECO 209Y MACROECONOMIC THEORY AND POLICY SOLUTIONS Term Test #2 LAST NAME FIRST NAME STUDENT NUMBER Circle your section
More informationSOLUTION ECO 202Y - L5101 MACROECONOMIC THEORY. Term Test #1 LAST NAME FIRST NAME STUDENT NUMBER. University of Toronto June 18, 2002 INSTRUCTIONS:
Department of Economics Prof. Gustavo Indart University of Toronto June 18, 2002 SOLUTION ECO 202Y - L5101 MACROECONOMIC THEORY Term Test #1 LAST NAME FIRST NAME STUDENT NUMBER INSTRUCTIONS: 1. The total
More information14.02 Principles of Macroeconomics Fall 2004
14.02 Principles of Macroeconomics Fall 2004 Quiz 1 Thursday, October 7, 2004 7:30 PM 9 PM Please, answer the following questions. Write your answers directly on the quiz. You can achieve a total of 100
More informationUniversity of Toronto July 27, 2012 ECO 209Y L0101 MACROECONOMIC THEORY. Term Test #3
Department of Economics Prof. Gustavo Indart University of Toronto July 27, 2012 SOLUTIONS ECO 209Y L0101 MACROECONOMIC THEORY Term Test #3 LAST NAME FIRST NAME STUDENT NUMBER INSTRUCTIONS: 1. The total
More information14.02 PRINCIPLES OF MACROECONOMICS QUIZ 3 05/10/2012
14.02 PRINCIPLES OF MACROECONOMICS QUIZ 3 05/10/2012 PROFESSOR: FRANCESCO GIAVAZZI NAME: FRIDAY RECITATION: 1. True/False/Uncertain [30 points] Please state whether each of the following claims are true,
More informationFETP/MPP8/Macroeconomics/Riedel. General Equilibrium in the Short Run II The IS-LM model
FETP/MPP8/Macroeconomics/iedel General Equilibrium in the Short un II The -LM model The -LM Model Like the AA-DD model, the -LM model is a general equilibrium model, which derives the conditions for simultaneous
More informationClass 5. The IS-LM model and Aggregate Demand
Class 5. The IS-LM model and Aggregate Demand 1. Use the Keynesian cross to predict the impact of: a) An increase in government purchases. b) An increase in taxes. c) An equal increase in government purchases
More information3. OPEN ECONOMY MACROECONOMICS
3. OEN ECONOMY MACROECONOMICS The overall context within which open economy relationships operate to determine the exchange rates will be considered in this chapter. It is simply an extension of the closed
More informationPart I (45 points; Mark your answers in a SCANTRON)
Final Examination Name: ECON 4020/ SPRING 2005 Instructor: Dr. M. Nirei 1:30 3:20 pm, April 28, 2005 Part I (45 points; Mark your answers in a SCANTRON) (1) The GDP deflator is equal to: a. the ratio of
More informationThe Mundell-Fleming model
The Mundell-Fleming model 2013 General short run macroeconomic equilibrium Income influences demand for money Goods Market Money Market Interest rates affect aggregate demand in the open the economy Income
More informationThe Mundell-Fleming model
The Mundell-Fleming model dr hab. Bartłomiej Rokicki Chair of Macroeconomics and International Trade Theory Faculty of Economic Sciences, University of Warsaw Main assumptions of the model Small open economy
More informationThe Mundell-Fleming Model. Instructor: Dmytro Hryshko
The Mundell-Fleming Model Instructor: Dmytro Hryshko Small open economy with perfect capital mobility. r = r, where r is the world interest rate. Goods-market equilibrium: Y = C(Y T ) + I(r ) + G + NX(q)
More informationCome and join us at WebLyceum
Come and join us at WebLyceum For Past Papers, Quiz, Assignments, GDBs, Video Lectures etc Go to http://www.weblyceum.com and click Register In Case of any Problem Contact Administrators Rana Muhammad
More informationOnline Appendix A to chapter 16
Online Appendix A to chapter 16 The IS-LM Model and the DD-AA Model In this appendix we examine the relationship between the DD-AA model of the chapter and another model frequently used to answer questions
More informationIntroduction to Macroeconomics
Robert M. Kunst robert.kunst@univie.ac.at University of Vienna and Institute for Advanced Studies Vienna June 19, 2012 Outline Introduction National accounts The goods market The financial market The IS-LM
More informationLectures µy, ε,weseethata
Lectures 13-14 The effect of changes in foreign demand on output and net exports Suppose that foreign income is increased by 4Y. For simplicity, assume that Y = Y TB. Figure 12-4 A rise in foreign
More information3. If the price of a British pound increases from $1.50 per pound to $1.80 per pound, we say that:
STUDY GUIDE FINAL ECO41 FALL 2013 UDAYAN ROY Ch 13 National Income Accounting See the questions in Homework 7 and Homework 8. CHAPTER 14 Exchange Rates and Interest Parity 1. How many dollars would it
More informationInternational Linkages and Domestic Policy
International Linkages and Domestic Policy 11 Unit highlights: The basis of and gains from international trade Concept of absolute advantage and comparative advantage Balance of paymets Exchange rate system
More informationPrint last name: Solution Given name: Student number: Section number
Department of Economics University of Toronto at Mississauga ECO202Y5Y Macroeconomic Theory and Policy July 2003 Test Two Dr. Gu Date: Tuesday, July 8, 2003 Time allowed: Two hours Aids allowed: Calculator
More informationBusiness Cycles in. Mundell Fleming with Fixed Exchange Rates. Andrew Rose, Global Macroeconomics 10
Business Cycles in the Open Economy Mundell Fleming with Fixed Exchange Rates 1 Three Important Assumptions Prices are Sticky Business Cycle Model, Short Run Capital is Internationally Mobile No Substantial
More informationThe Mundell-Fleming-Tobin model
The Mundell-Fleming-Tobin model Lecture 11, ECON 4330 Nicolai Ellingsen (Adopted from Asbjørn Rødseth) April 15, 2015 Nicolai Ellingsen (Adopted from Asbjørn Rødseth) ECON 4330 April 15, 2015 1 / 40 Outline
More informationMacroeconomics Review Course LECTURE NOTES
Macroeconomics Review Course LECTURE NOTES Lorenzo Ferrari frrlnz01@uniroma2.it August 11, 2018 Disclaimer: These notes are for exclusive use of the students of the Macroeconomics Review Course, M.Sc.
More informationThe Mundell-Fleming-Tobin Model
The Mundell-Fleming-Tobin Model Lecture 11, ECON 4330 Inga Heiland (adapted slides from A. Rødseth & N. Ellingsen) April 10/17, 2018 Inga Heiland ECON 4330 April 10/17, 2018 1 / 40 Outline Outline 1 Money
More informationIntermediate Macroeconomic Theory II, Winter 2009 Solutions to Problem Set 2.
Intermediate Macroeconomic Theory II, Winter 2009 Solutions to Problem Set 2. 1. (14 points, 2 points each) Indicate for each of the statements below whether it is true or false, or elaborate on a statement
More information3. If the price of a British pound increases from $1.50 per pound to $1.80 per pound, we say that:
HOMEWORK 7 (ON CHAPTERS 14 AND 15) ECO41 FALL 2015 UDAYAN ROY Each correct answer is worth 1 point. The maximum score is 20 points. This homework is due in class on Wednesday, December 2. Please show your
More informationEC 205 Lecture 20 04/05/15
EC 205 Lecture 20 04/05/15 Remaining material till the end of the semester: Finish Chp 14 (1 subsection left) Open economy version of IS-LM (Chp 6.1&6.3+13) Chp 16 OR Dynamic macro models (As time permits)
More information1 Figure 1 (A) shows what the IS LM model looks like for the case in which the Fed holds the
1 Figure 1 (A) shows what the IS LM model looks like for the case in which the Fed holds the money supply constant. Figure 1 (B) shows what the model looks like if the Fed adjusts the money supply to hold
More informationECO 209Y MACROECONOMIC THEORY AND POLICY
Department of Economics Prof. Gustavo Indart University of Toronto December 4, 2013 ECO 209Y MACROECONOMIC THEORY AND POLICY Term Test #2 LAST NAME FIRST NAME STUDENT NUMBER Indicate your section of the
More informationThe IS-LM-BP=0 Model (aka Mundell-Fleming ) under Fixed Rates
ublic Affairs 854 enzie D. Chinn Spring 2008 Social Sciences 7418 University of Wisconsin-adison The IS-L-B=0 odel (aka undell-fleming ) under Fixed Rates This set of notes extends the IS-L-TB=0 model
More information7.1 Assumptions: prices sticky in SR, but flex in MR, endogenous expectations
7 Lecture 7(I): Exchange rate overshooting - Dornbusch model Reference: Krugman-Obstfeld, p. 356-365 7.1 Assumptions: prices sticky in SR, but flex in MR, endogenous expectations Clearly it applies only
More informationFinal Term Papers. Fall 2009 ECO401. (Group is not responsible for any solved content) Subscribe to VU SMS Alert Service
Fall 2009 ECO401 (Group is not responsible for any solved content) Subscribe to VU SMS Alert Service To Join Simply send following detail to bilal.zaheem@gmail.com Full Name Master Program (MBA, MIT or
More informationOpening the Economy. Topic 9
Opening the Economy Topic 9 Goals of Topic 9 What is the exchange rate? NX is back!! What is the link between the exchange rate and net exports? What is the trade deficit? How do different shocks affect
More informationAggregate Supply and Demand
Aggregate demand is the relationship between GDP and the price level. When only the price level changes, GDP changes and we move along the Aggregate Demand curve. The total amount of goods and services,
More informationChapter 19 Prices and Output in an Open Economy: Aggregate Demand and Aggregate Supply
Chapter 19 Prices and Output in an Open Economy: Aggregate Demand and Aggregate Supply As it is the nominal or money price of goods, therefore, which finally determines the prudence or imprudence of all
More informationSolutions To Problem Set Five
Lecture 6 Simultaneous equilibrium in both goods and financial markets in the IS LM model () Idea: Any point on the IS curve represents the equilibrium level of output at an interest rate in the goods
More informationSOLUTION ECO 209Y - L5101 MACROECONOMIC THEORY. Term Test #1 LAST NAME FIRST NAME STUDENT NUMBER. University of Toronto June 22, 2004 INSTRUCTIONS:
Department of Economics Prof. Gustavo Indart University of Toronto June 22, 2004 SOLUTION ECO 209Y - L5101 MACROECONOMIC THEORY Term Test #1 LAST NAME FIRST NAME STUDENT NUMBER INSTRUCTIONS: 1. The total
More informationSimultaneous Equilibrium in Output and Financial Markets: The Short Run Determination of Output, the Exchange Rate and the Current Account
Fletcher School, Tufts University Simultaneous Equilibrium in Output and Financial Markets: The Short Run Determination of Output, the Exchange Rate and the Current Account Prof. George Alogoskoufis The
More informationTHE KEYNESIAN MODEL IN THE SHORT AND LONG RUN
Lecture: THE KENESIAN MODEL IN THE SHORT AND LONG RUN In the short run actual GDP,, may be lower or higher or equal to full-employment GDP,. The aim of the Keynesian model in the short run is to explain
More informationQUESTIONS CHAPTER 25 SHORT-RUN ECONOMIC POLICY
QUESTIONS CHAPTER 25 SHORT-RUN ECONOMIC POLICY Question 25.1 Suppose the citizens of a small open economy with a fixed exchange rate suddenly realize that the future is not as bright as they had imagined.
More information14.02 Quiz #2 SOLUTION. Spring Time Allowed: 90 minutes
*Note that we decide to not grade #10 multiple choice, so your total score will be out of 97. We thought about the option of giving everyone a correct mark for that solution, but all that would have done
More informationToday s lecture: Current U.S. fiscal policy. Monetary policy in open economy. Fixed exchange rates: IMF World Economic Outlook
Today s lecture: Current U.S. fiscal policy IMF World Economic Outlook Monetary policy in open economy. Fixed exchange rates: Short-run: IS-LM Medium run: AS-AD. Short and medium term effects of current
More informationAGGREGATE EXPENDITURE AND EQUILIBRIUM OUTPUT. Chapter 20
1 AGGREGATE EXPENDITURE AND EQUILIBRIUM OUTPUT Chapter 20 AGGREGATE EXPENDITURE AND EQUILIBRIUM OUTPUT The level of GDP, the overall price level, and the level of employment three chief concerns of macroeconomists
More informationEconomics 1012A: Introduction to Macroeconomics FALL 2007 Dr. R. E. Mueller Third Midterm Examination November 15, 2007
Economics 1012A: Introduction to Macroeconomics FALL 2007 Dr. R. E. Mueller Third Midterm Examination November 15, 2007 Answer all of the following questions by selecting the most appropriate answer on
More informationa) Calculate the value of government savings (Sg). Is the government running a budget deficit or a budget surplus? Show how you got your answer.
Economics 102 Spring 2018 Answers to Homework #5 Due 5/3/2018 Directions: The homework will be collected in a box before the lecture. Please place your name, TA name and section number on top of the homework
More information14.02 Principles of Macroeconomics Problem Set # 1, Answers
14.02 Principles of Macroeconomics Problem Set # 1, Answers Part I 1. True: The labor supply curve will shift up-left and a new equilibrium with a higher real wage will exist. This is, in part, due to
More information= C + I + G + NX = Y 80r
Economics 285 Chris Georges Help With ractice roblems 5 Chapter 12: 1. Questions For Review numbers 1,4 (p. 362). 1. We want to explain why an increase in the general price level () would cause equilibrium
More informationMacroeconomics - Licence 1 Economie Gestion
Macroeconomics - Licence 1 Economie Gestion Chapter 4: The Goods market 1 1 Remi.Bazillier@univ-orleans.fr http://remi.bazillier.free.fr Université d Orléans Plan The Goods market When economists think
More informationBusiness Fluctuations. Notes 05. Preface. IS Relation. LM Relation. The IS and the LM Together. Does the IS-LM Model Fit the Facts?
ECON 421: Spring 2015 Tu 6:00PM 9:00PM Section 102 Created by Richard Schwinn Based on Macroeconomics, Blanchard and Johnson [2011] Before diving into this material, Take stock of the techniques and relationships
More informationEconomics 302 Intermediate Macroeconomic
Economics 302 Intermediate Macroeconomic Theory and Policy (Spring 2010) Lecture 22-25 Apr. 12-Apr. 21, 2010 Foreign Trade and the Exchange Rate Chapter 12 Outline Foreign trade and aggregate demand The
More information14.02 Exam 2. April 21, Professor: Francesco Giavazzi. TAs: Joaquin Blaum, Fernando Duarte, Maya Eden, Camilo García, Anna Zabai
4.02 Exam 2 April 2, 20 Professor: Francesco Giavazzi. TAs: Joaquin Blaum, Fernando Duarte, Maya Eden, Camilo García, Anna Zabai tudent Name: ection: Multiple Choice Questions (5 points each). Under a
More informationn Answers to Textbook Problems
100 Krugman/Obstfeld/Melitz International Economics: Theory & Policy, Tenth Edition n Answers to Textbook Problems 1. A decline in investment demand decreases the level of aggregate demand for any level
More informationQuestion 5 : Franco Modigliani's answer to Simon Kuznets's puzzle regarding long-term constancy of the average propensity to consume is that : the ave
DIVISION OF MANAGEMENT UNIVERSITY OF TORONTO AT SCARBOROUGH ECMCO6H3 L01 Topics in Macroeconomic Theory Winter 2002 April 30, 2002 FINAL EXAMINATION PART A: Answer the followinq 20 multiple choice questions.
More informationECON 3312 Macroeconomics Exam 2 Spring 2017 Prof. Crowder
ECON 3312 Macroeconomics Exam 2 Spring 2017 Prof. Crowder Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Suppose the economy is currently
More informationProfessor Christina Romer SUGGESTED ANSWERS TO PROBLEM SET 5
Economics 2 Spring 2016 Professor Christina Romer Professor David Romer SUGGESTED ANSWERS TO PROBLEM SET 5 1. The left-hand diagram below shows the situation when there is a negotiated real wage,, that
More informationSession 8. Business Cycles in a Closed Economy.
Session 8. Business Cycles in a Closed Economy. Building a Model of Aggregate Demand Money Market: The LM Curve Goods Market: The IS Curve A Graphical Representation of the Equilibrium: The IS/LM Model
More informationEC202 Macroeconomics
EC202 Macroeconomics Koç University, Summer 2014 by Arhan Ertan Study Questions 4 1. Assume that the LM curve for a small open economy with a floating exchange rate is given by Y = 200r 200 + 2(M/P), while
More informationSAMPLE EXAM QUESTIONS FOR FALL 2018 ECON3310 MIDTERM 2
SAMPLE EXAM QUESTIONS FOR FALL 2018 ECON3310 MIDTERM 2 Contents: Chs 5, 6, 8, 9, 10, 11 and 12. PART I. Short questions: 3 out of 4 (30% of total marks) 1. Assume that in a small open economy where full
More informationChapter 4 Monetary and Fiscal. Framework
Chapter 4 Monetary and Fiscal Policies in IS-LM Framework Monetary and Fiscal Policies in IS-LM Framework 64 CHAPTER-4 MONETARY AND FISCAL POLICIES IN IS-LM FRAMEWORK 4.1 INTRODUCTION Since World War II,
More informationECO 209Y MACROECONOMIC THEORY AND POLICY. Term Test #2. December 13, 2017
ECO 209Y MACROECONOMIC THEORY AND POLICY Term Test #2 December 13, 2017 U of T E-MAIL: @MAIL.UTORONTO.CA SURNAME (LAST NAME): GIVEN NAME (FIRST NAME): UTORID (e.g., LIHAO118): INSTRUCTIONS: The total time
More informationECM134 International Money and Finance 2012/13 Exam Paper Model Answers
ECM34 International Money and Finance 202/3 Exam Paper Model Answers Alexander Mihailov Department of Economics University of Reading 5 January 202 TWO hours; answer TWO of the five questions that follow.
More informationMacroeconomics II The Small Open Economy IS-LM - Mundell-Fleming Model
Macroeconomics II The Small Open Economy IS-LM - Mundell-Fleming Model Vahagn Jerbashian Ch. 12 from Mankiw (2010, 2003) Spring 2018 Where we are and where we are heading to Today we will consider the
More informationHandout #7 A Fixed Price Model of Aggregate Output
Handout #7 A Fixed Price Model of Aggregate Output Introduction This and the following handout construct a model of Y (i.e., aggregate real output or real GDP) known as the Aggregate Demand/Aggregate Supply
More information1) Real and Nominal exchange rates are highly positively correlated. 2) Real and nominal exchange rates are well approximated by a random walk.
Stylized Facts Most of the large industrialized countries floated their exchange rates in early 1973, after the demise of the post-war Bretton Woods system of fixed exchange rates. While there have been
More informationFEEDBACK TUTORIAL LETTER ASSIGNMENT 2 INTERMEDIATE MACRO ECONOMICS IMA612S
FEEDBACK TUTORIAL LETTER 2 nd SEMESTER 2017 ASSIGNMENT 2 INTERMEDIATE MACRO ECONOMICS 1 ASSIGNMENT 2 SECTION A [20 marks] QUESTION 1 [20 marks, 2 marks each] For each of the following questions, select
More informationINCOME EXPENDITURE MODEL: GOODS MARKET EQUILIBRIUM. Dongpeng Liu Department of Economics Nanjing University
INCOME EXPENDITURE MODEL: GOODS MARKET EQUILIBRIUM Dongpeng Liu Department of Economics Nanjing University ROADMAP INCOME EXPENDITURE LIQUIDITY PREFERENCE IS CURVE LM CURVE SHORT-RUN IS-LM MODEL AGGREGATE
More informationTOPIC 1: IS-LM MODEL...3 TOPIC 2: LABOUR MARKET...23 TOPIC 3: THE AD-AS MODEL...33 TOPIC 4: INFLATION AND UNEMPLOYMENT...41 TOPIC 5: MONETARY POLICY
TOPIC 1: IS-LM MODEL...3 TOPIC 2: LABOUR MARKET...23 TOPIC 3: THE AD-AS MODEL...33 TOPIC 4: INFLATION AND UNEMPLOYMENT...41 TOPIC 5: MONETARY POLICY AND THE RESERVE BANK OF AUSTRALIA...53 TOPIC 6: THE
More informationExaminers commentaries 2011
Examiners commentaries 2011 Examiners commentaries 2011 16 International economics Zone A Important note This commentary reflects the examination and assessment arrangements for this course in the academic
More information