1 The IS*curve:Goods Market Equilibrium Y C(Y-T)+I(r*)+G+NX(e) The IS*curve is drawn for a given value of r*. Intuition for the slope: ↓e三↑NX三个Y IS* CHAPTER 12 Aggregate Demand in the Open Economy slide 5
slide 5 The IS* curve is drawn for a given value of r*. Intuition for the slope: Y e IS* Y C (Y T ) I (r *) G NX (e) e NX Y 1
Interest rate,r 1 LA 1.The money market equilibrium condition,·- 2.·and the world interest rate . Income,output,Y (b)The LM米Curve Exchange rate,e 3.determine the level of income. Income,output,y CHAPTER 12 Aggregate Demand in the Open Economy slide 6
slide 6 1
The LM*curve:Money Market Eq'm M/P L(r*,Y) The LM*curve ■is drawn for a given LM* value of r* ■is vertical because: given r*,there is only one value of r that equates money demand with supply, regardless of e. CHAPTER 12 Aggregate Demand in the Open Economy slide 7
slide 7 The LM* curve § is drawn for a given value of r* § is vertical because: given r* , there is only one value of Y that equates money demand with supply, regardless of e. Y e LM* M P L(r * ,Y ) 1
1 Equilibrium in the Mundell-Fleming model Y =C(Y-T)+I(r*)+G+NX(e) M/P L(r*,Y) e LM* Equilibrium Exchange rate TS* equilibrium level of income Return CHAPTER 12 Aggregate Demand in the Open Economy slide 8
slide 8 Y e LM* M P L(r * ,Y ) IS* Y C (Y T ) I (r *) G NX (e) Equilibrium Exchange rate equilibrium level of income 1 Return
2 Floating fixed exchange rates In a system of floating exchange rates,e is allowed to fluctuate in response to changing economic conditions. In contrast,under fixed exchange rates,the central bank trades domestic for foreign currency at a predetermined price(trades A for B用A换B). We now consider fiscal,monetary,and trade policy: first in a floating exchange rate system,then in a fixed exchange rate system. CHAPTER 12 Aggregate Demand in the Open Economy slide 9
slide 9 § In a system of floating exchange rates, e is allowed to fluctuate in response to changing economic conditions. § In contrast, under fixed exchange rates, the central bank trades domestic for foreign currency at a predetermined price (trades A for B 用A换B). § We now consider fiscal, monetary, and trade policy: first in a floating exchange rate system, then in a fixed exchange rate system. 2