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Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Capitolo 10 Domanda Aggregata, Prodotto, e Tasso di Interesse.

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Presentation on theme: "Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Capitolo 10 Domanda Aggregata, Prodotto, e Tasso di Interesse."— Presentation transcript:

1 Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Capitolo 10 Domanda Aggregata, Prodotto, e Tasso di Interesse

2 Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 10.1 Cyclical fluctuations Figure 10.01

3 Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 10.1 Time Real GDP 0 Long-term growth trend Changes we see Actual real GDP, and how we decompose them. (-) cyclical deviation (+) cyclical deviation Figure 10.01

4 Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Table 10.1 Table 10.01 Openness and size (%)

5 Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 10.2 General macroeconomic equilibrium in the open economy Figure 10.02

6 Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 10.2 Interaction of markets in the closed economy Goods Market Money Market Interest rates affect aggregate demand Income influences demand for money Figure 10.02

7 Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 10.2 Now we open the economy… Goods Market Money Market Foreign Exchange Market Real exchange rates affect aggregate demand Interest rates influence the exchange rate Interest rates affect aggregate demand Income influences demand for money Figure 10.02

8 Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Identità contabile fondamentale (equazione delle risorse-impieghi) Y = C + I + G + XZ C = C(, Y-T), con e T dati o esogeni ( * e T * ) I = I(i, q), q esogeno (animal spirits), q * G esogena G * SPPC =X-Z=SPPC(Y, Y *, ), Y * reddito estero

9 Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Parità dei tassi di interesse: i * = i i us =i e (1+i us )=(1/S t )(1+i e )S t+1 =(1+i e ) S t+1 /S t S t+1 =(1+s) S t (1+i us )=(1+i e )(1+s) se prendo i log (approssim.) i us =i e +s dove s è la variazione del tasso di cambio nominale se i us >i e per garantire lo stesso rendimento delle attività nei due paesi s>0 (apprezzamento delleuro), ma ciò implica anche che allinizio (quando si verifica i us >i e ) leuro si deve svalutare

10 Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 10.3 The 45° diagram Figure 10.03

11 Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 10.3 Output Desired demand 0 varies Figure 10.03 varies Ceteris paribus

12 Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 10.3 Equilibrium condition Desired demand 0 Figure 10.03 Output Y´Y

13 Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 10.3 The 45° Diagram, a.k.a. The Keynesian Cross Desired demand 0 A Figure 10.03 Output

14 Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 10.4 The multiplier Figure 10.04

15 Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 10.4 Start from an equilibrium in the goods market Desired demand Y DD 45° DD(Y) A Figure 10.04 Output 0

16 Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 10.4 Output Desired demand Y 45° DD´(Y) A DD DD(Y) Government expenditures increase Figure 10.04 Output 0

17 Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 B Figure 10.4 Output increases to match increase in demand Output Desired demand A Y Y 45° A´ DD(Y) DD´(Y) Figure 10.04 Output 0

18 Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 10.4 BA´ increase in income means DD´ increases too Output Desired demand A Y Y 45° B B´ DD(Y) DD´(Y) Figure 10.04 Output 0 A´

19 Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 A´´ Figure 10.4 Output increases again to meet induced demand, A´B´ Output Desired demand Y Y 45° B A´ B´ DD(Y) DD´(Y) A Figure 10.04 Output 0

20 Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 A´´ Figure 10.4 The government spending multiplier Output Desired demand A Y Y 45° B A´ E Y* Y B´ DD(Y) DD´(Y) Figure 10.04 Output 0

21 Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Table 10.2 Demand Multipliers: Five Examples The numbers represent the effect of a change in government expenditure of 1% of real GDP in 2000 and 2001 in all five regions on each economy's output (as percentage deviation from baseline). Table 10.02

22 Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 10.5 Deriving the IS curve Figure 10.05

23 Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 10.5 Desired demand Output Interest rate Output Y=DD A Identifying an equilibrium combination of i and Y Figure 10.05 A

24 Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 10.5 Desired demand Output Interest rate Output Y=DD B A Equilibrium output will change if the interest rate changes A Figure 10.05 B

25 Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 10.5 Desired demand Output Interest rate Output A IS Y=DD B A IS curve derived by finding Ys for all is Figure 10.05 B

26 Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 10.5 Desired demand Output Interest rate Output A IS Y=DD B A To the right of the IS curve supply of goods exceeds their demand Excess supply of goods Figure 10.05 B D C D C

27 Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 10.5 Interest rate Output B A IS Excess supply of goods Excess demand for goods To the left of the IS curve demand for goods exceeds their supply Convince yourself that this is true! Hint: interest rates are lower than along the IS curve where Y=DD(i) Figure 10.05

28 Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 10.6 Exogenous increase in aggregate demand Figure 10.06

29 Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 10.6 Desired demand Output Interest rate Output A Y=DD Start from equilibrium in the goods market... IS A Figure 10.06

30 Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 10.6 Desired demand Output Interest rate Output B A Y=DD Exogenous increase in aggregate demand (e.g. G increases, but hold i constant at first) A IS B Figure 10.06

31 Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 10.6 Desired demand Output Interest rate Output B A IS´ Y=DD Similar shift to that from A to B would occur for all other values of the interest rate A IS B Figure 10.06

32 Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 10.7 Figure 10.07 GDP growth and Tobins q in the USA

33 Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 10.8 Deriving the LM curve Figure 10.08

34 Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 10.8 Real money stock Output Holding the real money supply constant, we determine i for some given level of output... Real money supply A A Figure 10.08 Nominal nterest rate

35 Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 10.8 Real money stock Output Same question for a higher level of output... Real money supply A B A Figure 10.08 B Nominal nterest rate

36 Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 10.8 Real money stock Output LM LM curve derived by finding is for all Ys Real money supply A B B A Figure 10.08 Nominal nterest rate

37 Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 10.8 Real money stock Output LM To the right of the LM curve demand for real balances exceeds their supply Real money supply A B Excess demand for money C C Figure 10.08 B A Nominal nterest rate

38 Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 10.8 Real money stock Output A LM To the left of the LM curve supply of real balances exceeds their demand Real money supply A B Excess supply of money C C Figure 10.08 B Nominal nterest rate

39 Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 10.8 Output LM Excess demand for money Excess supply of money Money market equilibrium on the LM curve Figure 10.08 Nominal nterest rate

40 Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 10.09 Increasing money supply shifts LM outward Figure 10.09

41 Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 10.09 Real money stock Output A B A LM´ Increasing money supply shifts LM outward (at the same interest rate, we need Y to go up for greater D) Real money supply LM B Figure 10.09 Nominal nterest rate

42 Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 10.09 Real money stock Output A A LM´ Increasing money supply shifts LM outward (at the same Y, we need i to go down) Real money supply LM C C Figure 10.09 Nominal nterest rate

43 Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 i* Financial integration line Figure 10.10 Interest rate The balance of payments line Figure 10.10 Output

44 Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 10.11 General equilibrium Figure 10.11

45 Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 10.11 Interest rate IS Equilibrium in the goods market Changes in output will occur when we are not on the IS curve (as response to shortage to the left of IS and surplus to the right). Figure 10.11 Output

46 Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 10.11 Interest rate LM Equilibrium in the money market Changes in the interest rate will occur when we are not on the LM curve. Below LM there is an excess demand for money (bonds chase money). Above the LM there is an excess supply of money (money chases bonds). Figure 10.11 Output

47 Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 i* Financial integration line Figure 10.11 Output Interest rate Equilibrium in international capital markets When domestic and foreign rates of return are not the same, capital will flow towards the higher returns until returns are equalized. Figure 10.11

48 Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 i* Financial integration line Figure 10.11 Interest rate General equilibrium LM IS A Figure 10.11 Output

49 Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 10.12 Money policy under fixed exchange rates Figure 10.12

50 Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 i* Financial integration line Figure 10.12 Interest rate LM IS A Starting from general equilibrium, there is an unanticipated increase in the supply of money Figure 10.12 Output

51 Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 i* Financial integration line Figure 10.12 Interest rate LM IS A Starting from general equilibrium, there is an unanticipated increase in the supply of money LM´ Figure 10.12 Output

52 Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 i* Financial integration line Figure 10.12 Interest rate IS A Note: points A,B,C each satisfy only two of three equilibrium conditions LM´ C B This condition is not moving! Figure 10.12 Output

53 Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 i* Financial integration line Figure 10.12 Interest rate IS A Implication of fixed exchange rates in this case: No reason for the IS curve to move. LM´ C B This condition is not moving either! Figure 10.12 Output

54 Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 i* Financial integration line Figure 10.12 Interest rate IS A The central bank has to bring LM back to the original position to keep the exchange rate fixed. LM´ Figure 10.12 Output

55 Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 i* Financial integration line Figure 10.12 Interest rate LM IS A The central bank has to bring LM back to the original position to keep the exchange rate fixed. LM´ Monetary policy is ineffective for changing output. Figure 10.12 Output

56 Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Table 10.4 Exogenous change Fixed exchange rates Flexible exchange rates Expansionary demand disturbanceIncreaseNo effect Expansionary monetary disturbanceNo effectIncrease Increase in foreign interest ratesDecreaseIncrease Effect on real GDP The Mundell-Fleming model: Summary Table 10.04

57 Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Table 10.3 Sterilized and unsterilized foreign exchange market interventions

58 Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 10.13 Demand disturbance, fixed exchange rates Figure 10.13

59 Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 i* Financial integration line Figure 10.13 Interest rate Starting from general equilibrium, there is an unanticipated increase in the demand for goods LM IS A Figure 10.13 Output

60 Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 i* Financial integration line Figure 10.13 Interest rate Starting from general equilibrium, there is an unanticipated increase in the demand for goods LM IS A IS´ Figure 10.13 Output

61 Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 i* Financial integration line Figure 10.13 Interest rate Note: points A,B,C each satisfy only two of three equilibrium conditions This condition is not moving! LM A B IS´ C Figure 10.13 Output

62 Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 i* Financial integration line Figure 10.13 Interest rate Implication of fixed exchange rates in this case: No reason for the IS curve to move (further). This condition is not moving either! LM A B IS´ C Figure 10.13 Output

63 Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 i* Financial integration line Figure 10.13 Interest rate The central bank has to move LM to the right to maintain the fixed exchange rate. LM IS´ C Figure 10.13 Output

64 Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 LM´ i* Financial integration line Figure 10.13 Interest rate The central bank has to move LM to the right to maintain the fixed exchange rate. Fiscal policy is effective for changing output. LM IS´ C Note: M0 increased by forex purchases of the central bank. Figure 10.13 Output

65 Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 i* Financial integration line Figure 10.13 Interest rate Review: Demand disturbance, fixed exchange rate, no capital controls LM IS A Figure 10.13 Output

66 Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 i* Financial integration line Figure 10.13 Interest rate Review: Demand disturbance, fixed exchange rate, no capital controls LM IS A IS´ Figure 10.13 Output C

67 Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 LM´ i* Financial integration line Figure 10.13 Interest rate Review: Demand disturbance, fixed exchange rate, no capital controls LM IS A IS´ Figure 10.13 Output C

68 Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Table 10.4 Exogenous change Fixed exchange rates Flexible exchange rates Expansionary demand disturbanceIncreaseNo effect Expansionary monetary disturbanceNo effectIncrease Increase in foreign interest ratesDecreaseIncrease Effect on real GDP The Mundell-Fleming model: Summary Table 10.04

69 Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 i* Financial integration line Figure 10.13 Interest rate Compare: Demand disturbance, fixed exchange rate, with capital controls LM IS A Figure 10.13 Output

70 Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 i* Financial integration line Figure 10.13 Interest rate Compare: Demand disturbance, fixed exchange rate, with capital controls LM IS A IS´ Figure 10.13 Output B Note: central bank independence is possible for a short-time now

71 Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 10.14 Argentina 1993-2003

72 Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 10.15 Policy mix Figure 10.15

73 Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 i* Financial integration line Figure 10.15 Interest rate LM IS A Policy mix: monetary policy moves with fiscal policy deliberately to change output holding i=i* Figure 10.15 Output

74 Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 i* Financial integration line Figure 10.15 Interest rate LM IS A Policy mix: monetary policy moves with fiscal policy deliberately to change output holding i=i* B IS´ LM´ M0 increased by securities purchases by central bank. Figure 10.15 Output

75 Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 10.16 (a) Financial disturbance, fixed exchange rate Figure 10.16

76 Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 i* Figure 10.16 (a) Interest rate IS Increase in rate of return on foreign assets, fixed exchange rate LM A Figure 10.16 Output

77 Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 i* Figure 10.16 (a) Interest rate LM IS Increase in rate of return on foreign assets, fixed exchange rate A i*´ This condition is not moving! Figure 10.16 Output Note: M0 will fall due to forex sales by central bank.

78 Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 i* Figure 10.16 Interest rate LM IS B Increase in rate of return on foreign assets, fixed exchange rate LM´ A i*´ This condition is not moving! Note: M0 will fall due to forex sales by central bank. Figure 10.16 Output

79 Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Table 10.4 Exogenous change Fixed exchange rates Flexible exchange rates Expansionary demand disturbanceIncreaseNo effect Expansionary monetary disturbanceNo effectIncrease Increase in foreign interest ratesDecreaseIncrease Effect on real GDP The Mundell-Fleming model: Summary Table 10.04

80 Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 10.17 A devaluation Figure 10.17

81 Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 i* Financial integration line Figure 10.17 Interest rate LM IS A To devalue the currency the central bank will bid up the price of foreign money, creating more M0 Output Figure 10.17

82 Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 i* Financial integration line Figure 10.17 Interest rate LM IS A To devalue the currency the central bank will bid up the price of foreign money, creating more M0 LM´ Output Figure 10.17

83 Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 i* Financial integration line Figure 10.17 Interest rate LM IS A To devalue the currency the central bank will bid up the price of foreign money, creating more M0 IS´ LM´ Lower S increases demand for goods. Output Figure 10.17 C

84 Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 10.18 Demand disturbance, flexible exchange rates Figure 10.18

85 Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 i* Financial integration line Figure 10.18 Interest rate LM A Real demand increases… IS Output Figure 10.18

86 Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 i* Financial integration line Figure 10.18 Interest rate LM A Real demand increases… IS´IS B Output Figure 10.18 However, the resulting increase in S will reduce the demand for goods.

87 Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 i* Financial integration line Figure 10.18 Interest rate LM IS A …i>i* will attract capital inflows, so S appreciates B IS´ However, the resulting increase in S will reduce the demand for goods. Output Figure 10.18

88 Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Table 10.4 Exogenous change Fixed exchange rates Flexible exchange rates Expansionary demand disturbanceIncreaseNo effect Expansionary monetary disturbanceNo effectIncrease Increase in foreign interest ratesDecreaseIncrease Effect on real GDP The Mundell-Fleming model: Summary Table 10.04

89 Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Figure 10.19 Monetary policy under flexible exchange rates Figure 10.19

90 Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 i* Financial integration line Figure 10.19 Interest rate LM IS A Increase in money supply lowers the interest rate IS´ C LM´ B Exchange rate depreciates increasing the demand for goods. Output Figure 10.19

91 Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Table 10.4 Exogenous change Fixed exchange rates Flexible exchange rates Expansionary demand disturbanceIncreaseNo effect Expansionary monetary disturbanceNo effectIncrease Increase in foreign interest ratesDecreaseIncrease Effect on real GDP The Mundell-Fleming model: Summary Table 10.04

92 Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Table 10.4 Exogenous change Fixed exchange rates Flexible exchange rates Expansionary demand disturbanceIncreaseNo effect Expansionary monetary disturbanceNo effectIncrease Increase in foreign interest ratesDecreaseIncrease Effect on real GDP The Mundell-Fleming model: Summary Table 10.04 Fixed exchange rates Flexible exchange rates Exogenous monetary instrumentExchange rateMoney supply Endogenous monetary instrumentMoney supplyExchange rate


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