Determinants of Aggregate Demand in an Open Economy How Disposable Income Changes Affect the Current Account An increase in disposable income(yd) worsens the CA A rise in yd causes domestic consumers to increase their spending on all goods Copyright C 2003 Pearson Education, Inc Slide 16-11
Copyright © 2003 Pearson Education, Inc. Slide 16-11 ▪ How Disposable Income Changes Affect the Current Account • An increase in disposable income (Y d ) worsens the CA. • A rise in Y d causes domestic consumers to increase their spending on all goods. Determinants of Aggregate Demand in an Open Economy
Determinants of Aggregate Demand in an Open Economy Table 16-1: Factors Determining the Current Account Change Effect on current account, Ca Real exchange rate.EP米/P个 CA个 Real exchange rate. EP*/PI CAM Disposable income,Y个 CAN Disposable income ydl CA个 Copyright C 2003 Pearson Education, Inc Slide 16-12
Copyright © 2003 Pearson Education, Inc. Slide 16-12 Determinants of Aggregate Demand in an Open Economy Table 16-1: Factors Determining the Current Account
The Equation of Aggregate Demand The four components of aggregate demand are combined to get the total aggregate demand D=C(r-1)+/+G+ CA(EP*/P,Y-7) a This equation shows that aggregate demand for home output can be written as D=D(EP*P,Y-T,l G) Copyright C 2003 Pearson Education, Inc Slide 16-13
Copyright © 2003 Pearson Education, Inc. Slide 16-13 ▪ The four components of aggregate demand are combined to get the total aggregate demand: D = C(Y – T) + I + G + CA(EP*/P, Y – T) ▪ This equation shows that aggregate demand for home output can be written as: D = D(EP*/P, Y – T, I, G) The Equation of Aggregate Demand
The Equation of Aggregate Demand The Real Exchange Rate and Aggregate Demand An increase in g raises Ca and D It makes domestic goods and services cheaper relative to foreign goods and services It shifts both domestic and foreign spending from foreign goods to domestic goods A real depreciation of the home currency raises aggregate demand for home output A real appreciation lowers aggregate demand for home output Copyright C 2003 Pearson Education, Inc Slide 16-14
Copyright © 2003 Pearson Education, Inc. Slide 16-14 ▪ The Real Exchange Rate and Aggregate Demand • An increase in q raises CA and D. – It makes domestic goods and services cheaper relative to foreign goods and services. – It shifts both domestic and foreign spending from foreign goods to domestic goods. – A real depreciation of the home currency raises aggregate demand for home output. – A real appreciation lowers aggregate demand for home output. The Equation of Aggregate Demand
The Equation of Aggregate Demand Y Real Income and Aggregate Demand A rise in domestic real income raises aggregate demand for home output A fall in domestic real income lowers aggregate demand for home output Copyright C 2003 Pearson Education, Inc Slide 16-15
Copyright © 2003 Pearson Education, Inc. Slide 16-15 ▪ Real Income and Aggregate Demand • A rise in domestic real income raises aggregate demand for home output. • A fall in domestic real income lowers aggregate demand for home output. The Equation of Aggregate Demand