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This 2 page Class Notes was uploaded by Ashish Kondoju on Wednesday April 6, 2016. The Class Notes belongs to Economics 5570 at Wayne State University taught by Shuan Jung in Spring 2016. Since its upload, it has received 25 views. For similar materials see Intermediate Macroeconomics in Economcs at Wayne State University.
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Date Created: 04/06/16
Lessons about trade policy Import restrictions cannot reduce a trade deficit. Even though NX is unchanged, there is less trade: The trade restriction reduces imports. The exchange rate appreciation reduces exports. Less trade means fewer “gains from trade.” Import restrictions on specific products save jobs in the domestic industries that produce those products but destroy jobs in export- producing sectors. Hence, import restrictions fail to increase total employment. Also, import restrictions create sectoral shifts, which cause frictional unemployment. Fixed exchange rates Under fixed exchange rates, the central bank stands ready to buy or sell the domestic currency for foreign currency at a predetermined rate. In the Mundell-Fleming model, the central bank shifts the LM* curve as required to keep e at its preannounced rate. This system fixes the nominal exchange rate. In the long run, when prices are flexible, the real exchange rate can move even if the nominal rate is fixed. Fiscal policy under fixed exchange rates Under floating rates, fiscal policy is ineffective at changing output. Under fixed rates, fiscal policy is very effective at changing output. Results: Δe = 0, ΔY > 0 Monetary policy under fixed exchange rates Under floating rates, monetary policy is very effective at changing output. Under fixed rates, monetary policy cannot be used to affect output. Results: Δe = 0, ΔY = 0 Trade policy under fixed exchange rates Under floating rates, import restrictions do not affect Y or NX. Under fixed rates, import restrictions increase Y and NX. But, these gains come at the expense of other countries: the policy merely shifts demand from foreign to domestic goods. Summary of policy effects in the Mundell-Fleming model
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