Week 7 Notes
Week 7 Notes Econ 322
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This 5 page Class Notes was uploaded by Tulsi on Sunday February 28, 2016. The Class Notes belongs to Econ 322 at University of South Carolina taught by Hauk in Spring 2016. Since its upload, it has received 29 views. For similar materials see Intermediate Macroeconomics in Economcs at University of South Carolina.
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Date Created: 02/28/16
Week 7 Notes Tuesday, February 23, 2016:25 PM 2/23/16 S-I = NCO = NX Savings - Investment = Net Capital Outflow = Net Exports Exchange Rates: nominal and real Nominal: ( e) relative price of 2 countries' currencies e = -When currency appreciates, it gains value (exchange rate increases) -When currency depreciates, it loses value (exchange rate decreases) Real Exchange Rate ( € ): relative price of 2 countries' goods € = e = nominal exchange rate; P = price in domestic country; P = price in foreign country Example: e = 120 Yen/$ P = $10,000/US car f P = 2400000 Yen/Japanese Car €= You can get 1/2 a Japanese Car for the price of 1 US car because € < 1 That means US exports more cars r = r* (real interest rate = world interest rate) in a small economy with perfect capital mobility "supply" of domesticcurrency "demand" for domestic currency mobility "supply" of domesticcurrency "demand" for domestic currency -If a small, domestic country runs a budget deficit: -NX decreases -€ increases -If a big, foreign country runs a deficit -Net exports increase, thereforeNCO increases -€ decreases -If an import tariff is put in place (trade protection) -Net exports shifts out -€ increases -"NX" stays the same Purchasing Power Parity Purchasing Power Parity In the long run, € converges to 1 € = 1 = 2/25/16 Mundell-Fleming Model (IS* - LM* Model) Short run model with sticky prices IS*: Y = C(Y-t) + I(r*) + G + NX(e) LM*: M/P = L(r*, Y) € = In the short run, changes in € are caused by changes in e. e LM* IS* y Flexible Exchange Rate: The exchange rate is determined by market forces -Monetary Policy: increase in money supply -LM* shifts right -e falls -Net Exports increase, GDP increases e LM* -e falls -Net Exports increase, GDP increases e LM* IS* y Fiscal Policy: increase in government spending -IS* shifts right -e increases -Y stays the same because Net Exports decrease LM* e IS* y Fixed exchange rate: e will not be allowed to deviate from a pre-determined level set by the government Monetary Policy: increase money supply -LM* shifts right -e starts to fall, so they have to decrease the money supply back to the old level. e and y stay the same. Fiscal Policy: increase government spending -IS* shifts right -e starts to increase -so, need to increase the money supply -LM* shifts right -e stays the same and GDP increases e LM* e LM* IS* y SUMMARY TABLE Floating Fixed Exchange Exchange rate Rate Y e NX Y e NX Increase No increase decrease increase No No Govt change change change Spending Increase increase decrease Increase No change No No Money change change Supply Import No increase No increase No increase Restriction change change change
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