CHAPTER 18 MACROECONOMICS POLICY AND FLOATING EXCH.ppt
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CHAPTER 18 MACROECONOMICS POLICY AND FLOATING EXCH.ppt

CHAPTER18MACROECONOMICSPOLICYANDFLOATINGEXCHANGERATES.ppt

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MacroeconomicPolicyandFloatingExchangeRatesCHAPTERORGANIZATIONFISCALANDMONETARYPOLICYFISCALANDMONETARYPOLICYCHANGESINFISCALPOLICYDemand:thetotaldemandforloansintheeconomyi)privatesector:tofinanceCondurablesandIii)publicsector:govt’sneedforfunds=T-GSupply:fundsavailabletobeborrowedbytheprivateandpublicsectorsoftheeconomyShortrunsavingsdependonincomenotiClosedeconomy:i)publicsectordemandincreasesHigherinterestrateOpeneconomy:i)higheriattractsK-inflowIncreasedsupplyDrivesdownihenceexpansionaryfiscalpolicyhaslesseffectoniCHANGESINFISCALPOLICYclosedeconomyCHANGESINFISCALPOLICYopeneconomyCHANGESINFISCALPOLICYCHANGESINFISCALPOLICYContractionaryFiscalPolicy:ContractionaryFiscalPolicy:CHANGESINFISCALPOLICYCHANGESINFISCALPOLICYCHANGESINMONETARYPOLICYExpansionaryMonetaryPolicycentralbankincreasesthemoneysupplyormoneysupplygrowthrateThisincreasesthesupplyofloanablefundscausingadecreaseintheinterestrateThedecreaseininterestratescausesacapitaloutflow-(openeconomy)OpenEconomyCHANGESINMONETARYPOLICYCHANGESINMONETARYPOLICYMONETARYANDFISCALPOLICYINANOPENECONOMYMONETARYANDFISCALPOLICYINANOPENECONOMYPolicyeffectwasundertheassumptionofinstanteffect(nolag)onmacroeconomicvariablesHoldsif:financialmarketsareefficientsointerestratesareaffectedquicklyHighcapitalmobilityallowstheERtochangerelativelyquicklythereafterHowever,theresponseoftradeflowstoERchangesmaynotalwayshappenquicklyimportsandexportspricesmaynotrespondinstantlyInternationaltrademayrespondslowly(.5to1yr)tochangesinpricescomparedtotheresponseoffinancialmarketsInthelongrun,asacountry’scurrencydepreciates,itsexportsexpandandimportscontract(andviceversa)Intheshortrun,asERchanges,theresponseofX,MandCAbalancecouldveryeasilybeintheoppositedirectionPartlyduetoprearrangedcontractedtradetransactions(hedging)Governmentsusefiscalpolicytochangetheleveloftaxationand/orgovernmentspendingatthenationalleveltoaffectthelevelofeconomicactivity(GDP).Governmentsusemonetarypolicytochangethemoneysupplyorinterestratestoaffec