Aggregate Demand, Output, and the Current Account in the Short Run
|
|
- Derick Russell
- 6 years ago
- Views:
Transcription
1 Fletcher School, Tufts University Aggregate Demand, Output, and the Current Account in the Short Run Prof. George Alogoskoufis
2 Aggregate Demand, Output Determination and the Exchange Rate We shall now focus on short run determination determination of output (and employment and the current account, and the effects of the exchange rate on the output market. We shall continue to assume that in the short-run the price level is predetermined as the adjustment of the prices of goods and services in very gradual. This assumption is the basis of the Keynesian approach to macroeconomics and aggregate fluctuations. As we have already seen in an open economy, aggregate demand for domestic output is not the same as aggregate domestic expenditure C+I+G, as part of domestic expenditure is directed towards imports, which are produced abroad, and part of the demand for domestic output comes from abroad, in the form of exports. 2
3 Aggregate Demand in an Open Economy Aggregate demand for domestic output D is equal to domestic expenditure on goods and services (consumption, investment, and government spending, which we shall now denote by Z, plus the trade balance (exports minus imports, which we shall denote by NX. Aggregate domestic expenditure is defined by, and refers to aggregate expenditure by domestic residents. Z=C+I+G Because part of the domestic expenditure is on imports M, imports must be substracted. In addition, part of the demand for domestic output comes from abroad, in the form of demand for exports X. Thus, exports must be added to the demand for domestic output. The difference of exports from imports defines the trade balance (or net exports, Thus, aggregate demand in an open economy is given by, NX=X-M D= Z+NX = C+I+G + X-M In order to analyze the determinants of aggregate demand, we must consider the determinants of imports and exports, in addition to the components of domestic expenditure, such as consumption, investment and government purchases, which we have already analyzed. 3
4 The Short Run Determinants of Exports: Foreign Income and the Real Exchange Rate Exports are the part of foreign demand that falls on domestic goods. We shall assume that they depend on two factors in the short run. First, they depend on foreign income: Higher foreign income means higher foreign demand for all goods, both foreign and domestic. So higher foreign income leads to higher domestic exports. Second, they also depend on the real exchange rate: The higher the price of domestic goods in terms of foreign goods, the lower the foreign demand for domestic goods. In other words, the higher the real exchange rate, the lower are exports. Therefore, the demand for exports function can be written as, X=X(Y*,Q (+, - where Y* is real foreign income and Q is the real exchange rate, defined as, Q=SP/P* where S is the nominal exchange rate (units of foreign currency per unit of domestic currency, P is the domestic price level and P* is the foreign price level (in foreign currency units. The export demand function is a behavioral equation which suggests that an increase in foreign income, Y *, leads to an increase in exports, and that an appreciation (increase in the real exchange rate, Q, leads to a decrease in exports. 4
5 The Short Run Determinants of Imports: Domestic Income and the Real Exchange Rate Imports are the part of domestic expenditure that falls on foreign goods. We shall assume that they depend on two factors in the short run. First, they clearly depend on domestic income: Higher domestic income leads to a higher domestic demand for all goods, both domestic and foreign. So a higher domestic income leads to higher imports. Second, as with exports, they also clearly depend on the real exchange rate the price of domestic goods in terms of foreign goods: The more expensive domestic goods are relative to foreign goods equivalently, the cheaper foreign goods are relative to domestic goods the higher is the domestic demand for foreign goods. So a higher real exchange rate leads to higher imports. Thus, we write the demand for the volume of imports, expressed in foreign currency, as, M*=M*(Y,Q (+,+ where Y is real domestic income and Q is the real exchange rate, defined as, Expressed in domestic currency, the volume of imports is given by, Q=SP/P* M=P*M*/SP=M*(Y,Q/Q=M(Y,Q (++ - (+? Thus, the volume of imports expressed in domestic currency is a positive function of the domestic real income Y, but the effects of the real exchange rate are ambiguous. There is a positive effect from an increase in the real exchange rate on the volume of imports expressed in foreign currency, but also a negative effect from the lower valuation of a given value of foreign imports in terms of domestic currency. The two effects of changes in the exchange rate on the volume and the valuation of imports thus point to different directions. 5
6 The Short Run Determinants of the Trade Balance The trade balance, NX is defined as exports minus imports, both expressed in domestic currency. Hence it is given by, NX=X(Y*,Q-M(Y-Q Clearly, ceteris paribus, an increase in foreign income causes an improvement in the trade balance, as it results in higher exports. Equally clearly, ceteris paribus, an increase in domestic income causes a deterioration in the trade balance, as it results in higher imports. The effects of a change in the real exchange rate are not so clear, because of the ambiguity concerning imports. Clearly, a real exchange rate appreciation reduces the volume of exports and increases the volume of imports in foreign currency. These two effects tend to cause a deterioration in the trade balance. However, a real exchange rate appreciation reduces the value of any volume of imports in domestic currency. This valuation effect tends to improve the trade balance. One can show that a real exchange rate appreciation will cause a deterioration of the trade balance if the sum of the elasticities of the demand for exports and imports with respect to the real exchange rate is higher than unity. In this case, the effects from the decrease in the volume of exports and the increase in the volume of imports will exceed the valuation effect and the trade balance will deteriorate following a real exchange rate appreciation. Equivalently, a real exchange rate depreciation will cause an improvement of the trade balance if the sum of the elasticities of the demand for exports and imports with respect to the real exchange rate is higher than unity. In this case, the effects from the increase in the volume of exports and the decrease in the volume of imports will exceed the valuation effect. This condition on the elasticities of the demand for exports and imports is called the Marshall Lerner and will be generally assumed to hold. In addition, since we are focusing on the short run, with domestic and foreign prices P and P* assumed fixed, we shall normalize them to unity (P=1, P*=1. This implies that Q=S, i.e that a change in the nominal exchange rate brings about a change in the real exchange rate. 6
7 Domestic Output and the Trade Balance Trade Balance, NX NX(Y*,S NX 1 0 Y 1 Y 0 Y 2 NX 2 Aggregate Output Υ 7
8 The Exchange Rate and the Trade Balance Trade Balance, NX NX(Y*,S 2 S 1 >S 0 >S 2 NX(Y*,S 0 NX(Y*,S 1 0 Y 1 Y 0 Y 2 Aggregate Output Υ 8
9 Foreign Output and the Trade Balance Trade Balance, NX NX(Y 2 *,S 0 Y 2 *>Y 0 *>Y 1 * NX(Y 0 *,S 0 NX(Y 1 *,S 0 0 Y 1 Y 0 Y 2 Aggregate Output Υ 9
10 The Determinants of Aggregate Demand in an Open Economy The Consumption Function C=C(Y-T ( + The Investment Function I(Y,i (+,- The Trade Balance Function NX=X(Y*,S-M*(Y,S/S=NX(Y,Y*,S (+, - (+,+, - (- + - Foreign Output and Income Y* is assumed exogenous Government Expenditures and Taxes G T are both assumed exogenous 10
11 The Aggregate Demand Function Aggregate Domestic Expenditure plus the Trade Balance The Aggregate Domestic Expenditure Function Z=C(Y-T+I(Y,i+G=Z(Y,i,G,T The Trade Balance Function NX=X(Y*,S-M*(Y,S/S=NX(Y,Y*,S The Aggregate Demand Function D=Z+NX=Z(Y,i,G,T+NX(Y,Y*,S 11
12 Diagrammatic Derivation of the Aggregate Demand Function Z, NX, D Z(G,T,i D(G,T,i,Y*,S Y 0 NX(Y*,S Aggregate Output Υ 12
13 The Trade Balance and Aggregate Demand Net exports, or the trade balance, are the difference between imports and exports TB=X(Y*,S-M*(Y,S/S An improvement in the trade balance increases aggregate demand, because in implies higher exports relative to imports and vice versa. An increase in domestic output and income causes a deterioration in the trade balance, as it causes an increase in the demand for imports for given exports. Hence, the aggregate demand curve has a lower slope than the domestic expenditure curve in an open economy An increase in foreign output and income causes an improvement in the trade balance, as it causes an increase in the demand for exports for given imports. Thus, an increase in foreign output causes an increase in aggregate demand, through the demand for exports. A depreciation of the exchange rate bring about an improvement in the trade balance, under the assumption that the demand for exports and imports is sufficiently elastic with respect to changes in the exchange rate. In fact, what is required is the Marshall Lerner condition, which implies that the sum of the elasticities of the demand for exports and imports with respect to the exchange rate must unity, so as to overcome the negative valuation effect from the exchange rate depreciation on the domestic value of a given volume of imports. This condition on the elasticities of the demand for exports and imports is usually assumed to hold. 13
14 The Aggregate Demand Function and Short Run Equilibrium in the Output Market The Aggregate Demand Function D=C(Y-T+I(Y,i+G+NX(Y, Y*,S ( Short Run Equilibrium in the Output Market Y=D The determination of equilibrium can be analyzed with the help of diagram, in the same way as for the closed economy. The aggregate demand function has a slope which is less that one, because the marginal propensity to consume, the marginal propensity to invest minus the marginal propensity to import imply than an increase in output and income increase aggregate demand by less than one for one. 14
15 Aggregate Demand and the Short Determination of AggregateOutput Aggregate Demand D E Y=D D(G,T,i,Y *,S 45 o Y E NX(Y *,S Aggregate Output Υ 15
16 Changes in the Exchange Rate, Aggregate Demand and Output Aggregate Demand D D 2 2 D=Y Depreciation D(S 2 D(S 0 Appreciation D(S 1 D 0 0 D 1 1 Y 1 Y 0 Y 2 NX(S 1 NX(S 0 NX(S 2 Aggregate Output Υ 16
17 The Exchange Rate and the IS Curve Nominal Interest Rate, i S 1 > S 0 > S 2 IS (T 0,G 0,S 2,Y* 0 IS (T 0,G 0,S 0,Y* 0 IS (T 0,G 0,S 1,Y* 0 Real Output Y 17
18 The J Curve Up to now we have been assuming that the volume of imports and exports responds immediately to changes in the exchange rate, or domestic and foreign income. However, in actual fact, the volume of imports and exports does not immediately react to changes in the exchange rate or incomes. The time lag from the time of the decision up to the time of the implementation of an export or an import order implies that initially the change in the volume of imports and exports following a depreciation of the exchange rate is very small. Thus, due to the increase in the domestic currency value of imports, a depreciation of the exchange rate initially causes a deterioration of the current account, as the very short run elasticities of import and export demand are low, and the Marshall Lerner condition is not immediately satisfied. Over time, imports and exports respond more elastically to the change in the exchange rate, and the current account improves. This phenomenon is called the J curve and can be depicted with the help of a diagram. 18
19 The J Curve and the Evolution of the Current Account over Time Following an Exchange Rate Depreciation 19
Exercise 1 Output Determination, Aggregate Demand and Fiscal Policy
Fletcher School, Tufts University Exercise 1 Output Determination, Aggregate Demand and Fiscal Policy Prof. George Alogoskoufis The Basic Keynesian Model Consider the following short run keynesian model
More informationExercise 2 Short Run Output and Interest Rate Determination in an IS-LM Model
Fletcher School, Tufts University Exercise 2 Short Run Output and Interest Rate Determination in an IS-LM Model Prof. George Alogoskoufis The IS LM Model Consider the following short run keynesian model
More informationExercise 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 information4. Simultaneous Goods and Financial Markets Equilibrium in the Short Run: The IS-LM Model
Fletcher School of Law and Diplomacy, Tufts University 4. Simultaneous Goods and Financial Markets Equilibrium in the Short Run: The IS-LM Model E212 Macroeconomics Prof. George Alogoskoufis Aggregate
More information2. Aggregate Demand and Output in the Short Run: The Model of the Keynesian Cross
Fletcher School of Law and Diplomacy, Tufts University 2. Aggregate Demand and Output in the Short Run: The Model of the Keynesian Cross E212 Macroeconomics Prof. George Alogoskoufis Consumer Spending
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 informationLong Run vs. Short Run
Long Run vs. Short Run Long Run: A period long enough for nominal wages and other input prices to change in response to a change in the nation s price level. The Basic Model of Economic Fluctuations Two
More informationIn an open economy the domestic production (Y ) can be either used domestically or exported. Open economies also import goods for domestic consumption
Chapter 19 - The Goods Market in an Open Economy The International Flows of Goods (Let d and f represents domestic and foreign goods respectively) In an open economy the domestic production (Y ) can be
More informationSummary of Macroeconomic Models ECS2602 C O M P I L E D B Y S K E N N E D Y- PA L M E R & T U Y S ( R E V I S E D F E B R U A RY )
Summary of Macroeconomic Models ECS2602 C O M P I L E D B Y S K E N N E D Y- PA L M E R & T U Y S 2 0 1 5 ( R E V I S E D F E B R U A RY 2 0 1 6 ) Important information The purpose of this summary is to
More informationPrepared by Iordanis Petsas To Accompany. by Paul R. Krugman and Maurice Obstfeld
Chapter 16 Output and the Exchange Rate in the Short Run Prepared by Iordanis Petsas To Accompany International Economics: Theory and Policy, Sixth Edition by Paul R. Krugman and Maurice Obstfeld Chapter
More informationHome Assignment 1 Financial Openness, the Current Account and Economic Welfare
Tufts University Department of Economics EC162 International Finance Prof. George Alogoskoufis Fall Semester 2016-17 Home Assignment 1 Financial Openness, the Current Account and Economic Welfare Consider
More informationLearning Objectives. 1. Describe how the government budget surplus is related to national income.
Learning Objectives 1of 28 1. Describe how the government budget surplus is related to national income. 2. Explain how net exports are related to national income. 3. Distinguish between the marginal propensity
More informationPrinciples of Macroeconomics Prof. Yamin Ahmad ECON 202 Spring 2007
Principles of Macroeconomics Prof. Yamin Ahmad ECON 202 Spring 2007 Midterm Exam II Name Id # Instructions: There are two parts to this midterm. Part A consists of multiple choice questions. Please mark
More informationSuggested Solutions to Assignment 7 (OPTIONAL)
EC 450 Advanced Macroeconomics Instructor: Sharif F. Khan Department of Economics Wilfrid Laurier University Winter 2008 Suggested Solutions to Assignment 7 (OPTIONAL) Part B Problem Solving Questions
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 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 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 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 informationProfessor Christina Romer SUGGESTED ANSWERS TO PROBLEM SET 6
Economics 2 Spring 2017 Professor Christina Romer Professor David Romer SUGGESTED ANSWERS TO PROBLEM SET 6 1.a. The main tool we use to analyze short-run fluctuations in the economy is the Keynesian cross.
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 informationChapter 8 A Short Run Keynesian Model of Interdependent Economies
George Alogoskoufis, International Macroeconomics, 2016 Chapter 8 A Short Run Keynesian Model of Interdependent Economies Our analysis up to now was related to small open economies, which took developments
More informationAGGREGATE DEMAND, AGGREGATE SUPPLY, AND INFLATION. Chapter 25
1 AGGREGATE DEMAND, AGGREGATE SUPPLY, AND INFLATION Chapter 25 2 One of the most important issues in macroeconomics is the determination of the overall price level Up to now, we took the price level as
More information14.02 Quiz 3. Time Allowed: 90 minutes. Fall 2012
14.02 Quiz 3 Time Allowed: 90 minutes Fall 2012 NAME: MIT ID: FRIDAY RECITATION: FRIDAY RECITATION TA: This quiz has a total of 3 parts/questions. The first part has 13 multiple choice questions where
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 informationTutorial letter 204/1/2016. Macroeconomics ECS2602. Department of Economics Semester 1. Answers to Assignment 04
ECS2602/204/1/2016 Tutorial letter 204/1/2016 Macroeconomics ECS2602 Department of Economics Semester 1 Answers to Assignment 04 Answers to Self-assessment Assignment 05 Dear student In this tutorial letter
More informationThe Short-Run: IS/LM
The Short-Run: IS/LM Prof. Lutz Hendricks Econ520 February 23, 2017 1 / 30 Issues In the growth models we studied aggregate demand was irrelevant. We always assumed there is enough demand to employ all
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 informationECON2010 test 2 study guide
ECON2010 test 2 study guide 1) In a closed economy public saving plus private saving is equal to a The budget deficit b The budget surplus c Taxes minus transfers d Investment 2) Which of the following
More informationMacroeconomic Policy and Short Term Interdependence in the Global Economy
Macroeconomic Policy and Short Term Interdependence in the Global Economy Beggar thy Neighbor and Locomotive Policies and the Need for Policy Coordination Prof. George Alogoskoufis, International Macroeconomics,
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 informationChapter 9 Saving, Investment, and Interest Rates
Chapter 9 Saving, Investment, and Interest Rates Multiple Choice Questions Choose the one alternative that best completes the statement or answers the question. 1. According to the life-cycle theory of
More informationY = 71; :5Y (1 0:5)Y = 71; 500 0:5Y = 71; 500 Y = 143; 000. Note that you can get the same result if you use the formula
Basic Keynesian Model (Chapter 0): () C 4; 000 + 0:5(Y T ) since Y D Y T T 5; 000; I P 55; 000; G 20; 000 NX T otal Exports T otal Im ports 5; 000 20; 000 5; 000 AE C+I P +G+NX 4; 000+0:5(Y 5; 000)+55;
More informationECS2602. Tutorial letter 201/1/2018. Macroeconomics. Department of Economics First semester ECS2602/201/1/2018
ECS2602/201/1/2018 Tutorial letter 201/1/2018 Macroeconomics ECS2602 Department of Economics First semester Answers to Assignment 01 Answers to Assignment 02 Answers to Self-assessment Assignment 04 BARCODE
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 informationPrinciple of Macroeconomics, Summer B Practice Exam
Principle of Macroeconomics, Summer B 2017 Practice Exam 1) If real GDP in a small country in 2015 is $8 billion and real GDP in the same country in 2016 is $8.3 billion, the growth rate of real GDP between
More informationShort run Output and Expenditure
Short run Output and Expenditure Short-run Output and Expenditure The Learning Objectives in this presentation are covered in Chapter 19: Output and Expenditure in the Short Run LEARNING OBJECTIVES 1 To
More informationRoad-Map to this Lecture
Allocation 1 Road-Map to this Lecture 1. Consumption 2. Investment 3. Government Expenditures 4. Equilibrium: equilibrium in financial markets 5. Fiscal Policy I slide 1 2 Demand for goods & services Components
More informationE) price level and the total output that firms wish to produce and sell, as technology and input prices vary.
Exam Name 1) The economyʹs aggregate supply (AS) curve shows the relationship between the A) price level and the marginal propensity to consume (MPC). B) equilibrium real GDP and marginal cost. C) price
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 informationChapter 11 The Determination of Aggregate Output, the Price Level, and the Interest Rate
Principles of Macroeconomics Twelfth Edition Chapter 11 The Determination of Aggregate Output, the Price Level, and the Interest Rate Copyright 2017 Pearson Education, Inc. 11-1 Copyright 11-2 Chapter
More information3. Financial Markets, the Demand for Money and Interest Rates
Fletcher School of Law and Diplomacy, Tufts University 3. Financial Markets, the Demand for Money and Interest Rates E212 Macroeconomics Prof. George Alogoskoufis Financial Markets, the Demand for Money
More informationChapter 23. Aggregate Supply and Aggregate Demand in the Short Run. In this chapter you will learn to. The Demand Side of the Economy
Chapter 23 Aggregate Supply and Aggregate Demand in the Short Run In this chapter you will learn to 1. Explain why an exogenous change in the price level shifts the AE curve and changes the equilibrium
More informationThe classical model of the SMALL OPEN
The classical model of the SMALL OPEN economy Open Economy Macroeconomics Dr hab. Joanna Siwińska-Gorzelak Overview This lecture is based on the chapter The Open Economy from G. Mankiw Macroeconomics This
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 informationChapter 17 (6) Output and the Exchange Rate in the Short Run
Chapter 17 (6) Output and the Exchange Rate in the Short Run Preview 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 informationECON 3010 Intermediate Macroeconomics Final Exam
ECON 3010 Intermediate Macroeconomics Final Exam Multiple Choice Questions. (60 points; 3 pts each) #1. An economy s equals its. a. consumption; income b. consumption; expenditure on goods and services
More informationChristina Zauner. June 8 th, Department of Economics, University of Vienna. The Goods Market of an Open Economy. Christina Zauner.
Department of Economics, University of Vienna June 8 th, 2011 The for In the final chapter we analyse the equilibrium in the goods market in an open economy Changes in domestic as well as foreign demand
More informationThe classical model of the SMALL OPEN economy
The classical model of the SMALL OPEN economy Open Economy Macroeconomics Dr hab. Joanna Siwińska-Gorzelak Overview This lecture is based on the chapter The Open Economy from G. Mankiw Macroeconomics This
More informationOpen Economy I: Concepts
Open Economy I: Concepts 1. Exchange Rates 2. Full Employment Output 3. Interest Rates 1 Exchange Rates Nominal exchange rate E t Cost of domestic currency in terms of foreign currency Foreign-currency
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 information14.02 Principles of Macroeconomics Fall 2004
14.02 Principles of Macroeconomics Fall 2004 Quiz 2 Thursday, November 4, 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 informationProblem Set #1: The Economy in the Long Run Econ 100B: Intermediate Macroeconomics
Problem Set #1: The Economy in the Long Run Econ 100B: Intermediate Macroeconomics Question 1: Calculating RGDP and NGDP. 2012 2013 Good Quantity Price Quantity Price Cars 300 $ 50 360 $ 60 Tires 1,200
More informationChapter 9 Dynamic Models of Investment
George Alogoskoufis, Dynamic Macroeconomic Theory, 2015 Chapter 9 Dynamic Models of Investment In this chapter we present the main neoclassical model of investment, under convex adjustment costs. This
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 information2. THE KEYNESIAN THEORY OF DETERMINATION OF NATIONAL INCOME
Ph: 98851 25025/26 www.mastermindsindia.com 2. THE KEYNESIAN THEORY OF DETERMINATION OF NATIONAL INCOME Q.No.1. Define Keynes concepts of equilibrium aggregate Income and output in an economy. (A) The
More informationEconomics 302 (Sec. 001) Intermediate Macroeconomic Theory and Policy (Spring 2012) 4/16/2012. UW Madison
Economics 302 (Sec. 001) Intermediate Macroeconomic Theory and Policy (Spring 2012) 4/16/2012 Instructor: Prof. Menzie Chinn Instructor: Prof. Menzie Chinn UW Madison 19 1 The IS Relation in an Open Economy
More informationIntermediate Macroeconomics: Economics 301 Exam 1. October 4, 2012 B. Daniel
October 4, 2012 B. Daniel Intermediate Macroeconomics: Economics 301 Exam 1 Name Answer all of the following questions. Each is worth 25 points. Label all axes, initial values and all values after shocks.
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 informationFiscal Policy and Economic Growth
Chapter 5 Fiscal Policy and Economic Growth In this chapter we introduce the government into the exogenous growth models we have analyzed so far. We first introduce and discuss the intertemporal budget
More informationThe Core of Macroeconomic Theory
PART III The Core of Macroeconomic Theory 1 of 33 The level of GDP, the overall price level, and the level of employment three chief concerns of macroeconomists are influenced by events in three broadly
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 informationProblem Set 5 Answers
Problem Set 5 Answers 14.02 Fall 2001 1 True or false, explain 1. False. It is true for gross exports, since a real devaluation makes domestic goods cheaper and hence increases the demand for them. For
More informationUNIT II: THE KEYNESIAN THEORY OF DETERMINATION OF NATIONAL INCOME
UNIT II: THE KEYNESIAN THEORY OF DETERMINATION OF NATIONAL INCOME LEARNING OUTCOMES At the end of this unit, you will be able to: Define Keynes concept of equilibrium aggregate income Describe the components
More informationMonetary Macroeconomics Lecture 3. Mark Hayes
Diploma Macro Paper 2 Monetary Macroeconomics Lecture 3 Aggregate demand: Investment and the IS-LM model Mark Hayes slide 1 Outline Introduction Map of the AD-AS model This lecture, continue explaining
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 informationPart2 Multiple Choice Practice Qs
Part2 Multiple Choice Practice Qs 1. The Keynesian cross shows: A) determination of equilibrium income and the interest rate in the short run. B) determination of equilibrium income and the interest rate
More informationSample Question Paper Economics. Class XII. Time : 3 Hours Maximum Marks : 100 General Instructions: Section A: Microeconomics
Sample Question Paper Economics Class XII Time : 3 Hours Maximum Marks : 100 General Instructions: 1. All questions in both sections are compulsory. However, there is internal choice in some questions.
More informationAggregate Demand, Output and the Exchange Rate in the Short Run. Prof. George Alogoskoufis Fletcher School, TuBs University
Aggregate Demand, Output and the Exchange Rate in the Short Run Prof. George Alogoskoufis Fletcher School, TuBs University Aggregate Demand and FluctuaFons in Output and the Exchange Rate We shall now
More informationAggregate Supply and Aggregate Demand
Aggregate Supply and Aggregate Demand Econ 120: Global Macroeconomics 1 1.1 Goals Goals Specific Goals Define the expenditure multiplier and how to compute it. Explain how recessions and expansions can
More informationSET-2 Subject Code: 030 COMMON PRE-BOARD EXAMINATION ECONOMICS Marking Scheme CLASS: XII Time Allowed: 3 hours Maximum Marks: 80
SET-2 Subject Code: 030 COMMON PRE-BOARD EXAMINATION 207-208 ECONOMICS Marking Scheme CLASS: XII Time Allowed: 3 hours Maximum Marks: 80 SECTION:A A firm is operating with a Total Variable Cost of 2000
More informationKeynesian Matters Source:
Money and Banking Lecture IV: The Macroeconomic E ects of Monetary Policy: IS-LM Model Guoxiong ZHANG, Ph.D. Shanghai Jiao Tong University, Antai November 1st, 2016 Keynesian Matters Source: http://letterstomycountry.tumblr.com
More informationECO 209Y MACROECONOMIC THEORY AND POLICY
Department of Economics Prof. Gustavo Indart University of Toronto February 14, 2014 ECO 209Y MACROECONOMIC THEORY AND POLICY Term Test # 3 LAST NAME FIRST NAME STUDENT NUMBER Indicate your section of
More informationThe Influence of Monetary and Fiscal Policy on Aggregate Demand P R I N C I P L E S O F. N. Gregory Mankiw. Introduction
C H A P T E R 34 The Influence of Monetary and Fiscal Policy on Aggregate Demand P R I N C I P L E S O F Economics N. Gregory Mankiw Introduction This chapter focuses on the short-run effects of fiscal
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 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 informationTHE AD (AGGREGATE DEMAND) / AS (AGGREGATE SUPPLY) MACRO MODEL
THE AD (AGGREGATE DEMAND) / AS (AGGREGATE SUPPLY) MACRO MODEL Again, we visit the supply and demand framework. However, when applied to Macroeconomics, we use the following terms in setting up our graph:
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 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 informationGDP accounting. GDP: market value of all newly produced goods and services produced in a given location in a specific time period
IS Curve GDP accounting GDP: market value of all newly produced goods and services produced in a given location in a specific time period GDP accounting GDP: market value of all newly produced goods and
More informationLecture 7: Introduction to Economic Fluctuations, The Keynesian Cross
Macroeconomics 1 Lecture 7: Introduction to Economic Fluctuations, The Keynesian Cross Dr Gabriela Grotkowska Tomasz Gajderowicz Based on slides by Mankiw, Macoreconomcis, 5e Key questions What determines
More informationThe Mundell Fleming Model. The Mundell Fleming Model is a simple open economy version of the IS LM model.
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
More informationRetake Exam in Macroeconomics, IB and IBP
Copenhagen Business School, Department of Economics, Birthe Larsen Question A Retake Exam in Macroeconomics, IB and IBP Answers 4hoursclosedbookexam 14th of August 2009 All questions, A,B,C and D are weighted
More informationChapter 7 Fixed Exchange Rate Regimes and Short Run Macroeconomic Policy
George Alogoskoufis, International Macroeconomics and Finance Chapter 7 Fixed Exchange Rate Regimes and Short Run Macroeconomic Policy Up to now we have been assuming that the exchange rate is determined
More informationBalance-of- Payments and Exchange-Rate Determination
INTERNATIONAL MONETARY AND FINANCIAL ECONOMICS Third Edition Balance-of- Payments and Exchange-Rate Determination Joseph R Daniels David D. VanHoose Elasticities Approach and Absorption Approach Copyright
More informationA Macroeconomic Theory of the Open Economy. Chapter 30
A Macroeconomic Theory of the Open Economy Chapter 30 Key Macroeconomic Variables in an Open Economy The important macroeconomic variables of an open economy include: net exports net foreign investment
More informationLecture 22. Aggregate demand and aggregate supply
Lecture 22 Aggregate demand and aggregate supply By the end of this lecture, you should understand: three key facts about short-run economic fluctuations how the economy in the short run differs from the
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 informationModel Question Paper Economics - II (MSF1A4)
Model Question Paper Economics - II (MSF1A4) Answer all 74 questions. Marks are indicated against each question. 1. Which of the following is true if the central bank of a country sells government securities
More informationProblem Set #3 ANSWERS. Due Tuesday, March 18, 2008
Name: SID: Discussion Section: Problem Set #3 ANSWERS Due Tuesday, March 18, 2008 Problem Sets MUST be word-processed except for graphs and equations. When drawing diagrams, the following rules apply:
More informationIn this chapter, you will learn C H A P T E R National Income: Where it Comes From and Where it Goes CHAPTER 3
C H A P T E R 3 National Income: Where it Comes From and Where it Goes MACROECONOMICS N. GREGORY MANKIW 007 Worth Publishers, all rights reserved SIXTH EDITION PowerPoint Slides by Ron Cronovich In this
More informationThe text was adapted by The Saylor Foundation under the CC BY-NC-SA without attribution as requested by the works original creator or licensee
the CC BY-NC-SA without attribution as requested by the works original creator or licensee 1 of 19 Chapter 21 IS-LM C H A P T E R O B J E C T I V E S By the end of this chapter, students should be able
More informationGovernment Expenditure
Fiscal Policy Part I Much fiscal policy is implemented, not through spending increases, but through tax credits and other so-called tax expenditures. The markets should respond to them as they do spending
More informationTextbook Media Press. CH 27 Taylor: Principles of Economics 3e 1
CH 27 Taylor: Principles of Economics 3e 1 The Building Blocks of Keynesian Analysis Keynesian economics is based on two main ideas: a) aggregate demand is more likely than aggregate supply to be the primary
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 informationThe Representative Household Model
Chapter 3 The Representative Household Model The representative household class of models is a family of dynamic general equilibrium models, based on the assumption that the dynamic path of aggregate consumption
More informationIntroduction to Economic Fluctuations. Instructor: Dmytro Hryshko
Introduction to Economic Fluctuations Instructor: Dmytro Hryshko 1 / 32 Outline facts about the business cycle how the short run differs from the long run an introduction to aggregate demand an introduction
More informationReview Seminar. Section A
Macroeconomics, Part I Petra Geraats, Easter 2018 Review Seminar Section A 1. Suppose that population and aggregate output in Europia are both growing at a rate of 2 per cent per year. Using the Solow
More informationEcon 98- Chiu Spring 2005 Final Exam Review: Macroeconomics
Disclaimer: The review may help you prepare for the exam. The review is not comprehensive and the selected topics may not be representative of the exam. In fact, we do not know what will be on the exam.
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 informationECO 209Y MACROECONOMIC THEORY AND POLICY LECTURE 3: AGGREGATE EXPENDITURE AND EQUILIBRIUM INCOME
ECO 209Y MACROECONOMIC THEORY AND POLICY LECTURE 3: AGGREGATE EXPENDITURE AND EQUILIBRIUM INCOME Gustavo Indart Slide 1 ASSUMPTIONS We will assume that: There is no depreciation There are no indirect taxes
More information