Macroeconomic Policy goals in an Open Economy Internal Balance: Full Employment and Price-Level Stability Under-and overemployment lead to price level movements that reduce the economy's efficiency To avoid price-level instability, the government must Prevent substantial movements in aggregate demand relative to its full-employment level Ensure that the domestic money supply does not grow too quickly or too slowly. Copyright C 2003 Pearson Education, Inc Slide 18-6
Copyright © 2003 Pearson Education, Inc. Slide 18-6 ▪ Internal Balance: Full Employment and Price-Level Stability • Under-and overemployment lead to price level movements that reduce the economy’s efficiency. • To avoid price-level instability, the government must: – Prevent substantial movements in aggregate demand relative to its full-employment level. – Ensure that the domestic money supply does not grow too quickly or too slowly. Macroeconomic Policy Goals in an Open Economy
Macroeconomic Policy goals in an Open Economy External Balance: The Optimal Level of the Current Account External balance has no full employment or stable prices to apply to an economys external transactions An economy's trade can cause macroeconomic problems depending on several factors The economys particular circumstances Conditions in the outside world The institutional arrangements governing its economic relations with foreign countries Copyright C 2003 Pearson Education, Inc Slide 18-7
Copyright © 2003 Pearson Education, Inc. Slide 18-7 Macroeconomic Policy Goals in an Open Economy ▪ External Balance: The Optimal Level of the Current Account • External balance has no full employment or stable prices to apply to an economy’s external transactions. • An economy’s trade can cause macroeconomic problems depending on several factors: – The economy’s particular circumstances – Conditions in the outside world – The institutional arrangements governing its economic relations with foreign countries
Macroeconomic Policy goals in an Open Economy Problems with Excessive current Account Deficits. They sometimes represent temporarily high consumption resulting from misguided government policies They can undermine foreign investors' confidence and contribute to a lending crisis Copyright C 2003 Pearson Education, Inc Slide 18-8
Copyright © 2003 Pearson Education, Inc. Slide 18-8 • Problems with Excessive Current Account Deficits: – They sometimes represent temporarily high consumption resulting from misguided government policies. – They can undermine foreign investors’ confidence and contribute to a lending crisis. Macroeconomic Policy Goals in an Open Economy
Macroeconomic Policy goals in an Open Economy Problems with Excessive current Account Surpluses: They imply lower investment in domestic plant and equipment ey can create potential problems for creditors to collect their money They may be inconvenient for political reasons Copyright C 2003 Pearson Education, Inc Slide 18-9
Copyright © 2003 Pearson Education, Inc. Slide 18-9 Macroeconomic Policy Goals in an Open Economy • Problems with Excessive Current Account Surpluses: – They imply lower investment in domestic plant and equipment. – They can create potential problems for creditors to collect their money. – They may be inconvenient for political reasons
Macroeconomic Policy goals in an Open Economy Several factors might lead policymakers to prefer that domestic saving be devoted to higher levels of domestic investment and lower levels of foreign investment It may be easier to tax It may reduce domestic unemployment It can have beneficial technological spillover effects Copyright C 2003 Pearson Education, Inc Slide 18-10
Copyright © 2003 Pearson Education, Inc. Slide 18-10 – Several factors might lead policymakers to prefer that domestic saving be devoted to higher levels of domestic investment and lower levels of foreign investment: – It may be easier to tax – It may reduce domestic unemployment. – It can have beneficial technological spillover effects Macroeconomic Policy Goals in an Open Economy