1. International Economics How Does the Open Macro-economy Work?
23/11/61
Session 22
How Does the Open Macro-economy Work?
Aj. Noom Tel

2. National Macro-economic Performance Goals
Internal Balance
Full employment, or an acceptably low unemployment rate
Price stability, or an acceptably low inflation rate
External balance
Sustainable composition of the country’s balance of payments with the rest of the world

3. A Basic Framework for Macro-economic Analysis
Domestic production depends on aggregate demand.
GDP = C + I + G + (X – M)
Aggregate Expenditure = C + I + G + (X – M)
Aggregate Demand = C + I + G + (X – M)
Inflation =

4. Trade depends on income.

5. A More Complete Framework : Three Markets
Mundell – Fleming Model
The Domestic Product Market
The Money Market
The Foreign Exchange Market (Balance of Payment)

6. The Investment – Saving Curve (Product Market)
IS2 up
Some exogenous shocks that shift the IS curve up (or to the right)
An increase in government spending or a tax cut (Fiscal Policy)
An improved customer expectations about the future
The shift in the tastes of foreign customers toward the country’s products.

7. The Liquidity – Money Curve (Money Market)
LM2
Down
Some exogenous shocks that shift the LM curve down (or to the right)
An increase in the money supply (Monetary Policy)
A decrease in average price level ( i.e., due to a sudden decline in oil prices)
The introduction of credit cards.

8. The Foreign Exchange Market (or Balance of Payment)
FE2
Down
Inflow > Outflow (Export > Import)
Some exogenous shocks that shift the FE curve down (or to the right)
An increase in exports
A decrease in foreign interest rate

9. Macro-economic Policies