4550ch16

Information about 4550ch16

Published on April 11, 2008

Author: Lindon

Source: authorstream.com

Content

CHAPTER 16:  CHAPTER 16 OUTPUT AND THE EXCHANGE RATE IN THE SHORT RUN Slide2:  Previous analysis: Y is treated as an exogenous variable in exchange rate determination. In reality both Y and E are determined simultaneously. Purpose: To develop a short-run model where E and Y are determined simultaneously. Slide3:  DETERMINATION OF “Y” IN THE SHORT RUN The goods (output) market is in equilibrium when real output (Y) equals aggregate demand. Aggregate demand (D) can be expressed as follows: Increases in EP*/P, Y-T, I, and G increases D. The equality of Y and D determines the short-run equilibrium output level. Figure 1 Slide4:  Simultaneous determination of E and Y requires 1. Equilibrium in the Output Market (The DD schedule), 2. Equilibrium in the Asset Market (The AA schedule). Output Market Equilibrium and the DD Schedule An increase in E, holding P and P* constant, increases EP*/P, which increases D. That is, D shifts up and Y increases. The positive correlation between E and Y is shown by the upward sloping DD curve. Figure 2. Slide5:  Example: Slide6:  Factors that shift the DD Schedule 1. An increase in G shifts the DD curve right. (An increase in G increases aggregate expenditures, holding E constant, and shifts DD right). Figure 3 2. An increase in T shifts the DD curve left. 3. An increase in I shifts the DD curve right. 4. An increase in P shifts the DD curve left. Slide7:  5. An increase in P* shifts the DD curve right. 6. An increase in consumer and business optimism shifts the DD curve right. 7. An increase in demand for home goods (change in tastes) shifts the DD curve right. Slide8:  Asset Market Equilibrium in the Short Run: The AA Schedule For asset markets to remain in equilibrium, a rise in Y must be accompanied by an appreciation of E. This can be shown as follows. Figure 4. Example: Slide9:  Factors that Shift the AA Schedule 1. An increase in M shifts the AA schedule up. (Increase in M increases M/P, reduces R at each output level and increases E. AA shifts up.) Figure 5 2. An increase in P shifts the AA schedule down. 3. An increase in expected E shifts AA up 4. An increase in foreign interest rates shifts AA up Slide10:  5. An increase in L(R,Y) shifts AA down. SHORT-RUN EQUILIBRIUM FOR AN OPEN ECONOMY: AA AND DD SCHEDULES Short-run equilibrium is achieved when the output and asset markets are both in equilibrium. That is, when AA=DD. Figure 6 Slide11:  TEMPORARY CHANGES IN MONETARY AND FISCAL POLICY How do changes in monetary and fiscal policies affect Y and E? The answer to this question depends on whether the change is temporary or permanent. In our analysis we assume that P is fixed in the short run and R* and P* are not affected by domestic events and policies. The basic difference between temporary and permanent changes is that temporary changes in policy do not affect the expected E but permanent changes do. Slide12:  Monetary Policy A temporary increase in M shifts the AA curve up but does not affect the DD curve. Both E and Y increase in the short run. Figure 7 Fiscal Policy A temporary increase in G or a decrease in T shifts the DD curve right but does not affect the AA curve. While Y increases, E falls (i.e., the US$ appreciates). Figure 8 Slide13:  Policies to Maintain Full Employment Temporary disturbances that lead to a recession or over-expansion can be offset by temporary monetary or fiscal policies. Suppose the economy is initially at full employment, but a temporary fall in world demand shifts the DD left causing a recession. In this case, either a temporary monetary or a fiscal expansion restores full employment. The two policies differ in their exchange rate effects. Figure 9 Slide14:  Suppose the economy is at full employment and is faced with a temporary increase in money demand. What happens to E and Y? Which policies can be used to restore full employment? Figure 10 Slide15:  INFLATION BIAS AND OTHER PROBLEMS OF POLICY FORMULATION 1. With rational expectations expansionary policies may cause an increase in prices with no change in output. 2. In practice it is hard to know whether the disturbance originates in the asset market or the goods market. 3. There is a bias towards using monetary policy even though the disturbance requires using fiscal policy. 4. Policy reversal may not be politically feasible. 5. The time lag between the time the disturbance occurs and the time the policy affects the economy is variable and long. Slide16:  PERMANENT SHIFTS IN MONETARY AND FISCAL POLICY A permanent policy shift affects the long run exchange rate. This affects the expected exchange rate. A Permanent Increase in the Money Supply A permanent increase in the money supply increases the expected exchange rate. Therefore, a permanent increase in M of the same magnitude as a temporary increase shifts the AA curve further to the right. Figure 11 Slide17:  Adjustment to A Permanent Increase in the Money Supply in the Long Run In the short run, starting from full employment, an increase in M increases output beyond the full employment level. In the long run the economy returns to its full employment level. How? Figure 12 Slide18:  A Permanent Fiscal Expansion If the economy is at full employment, a permanent increase in G or a decrease in T has no effect on output neither in the short run, nor in the long run. For example, a permanent increase in G shifts DD right. It also reduces the expected exchange rate, which shifts AA left. Therefore, E appreciates but output remains at full employment level. Figure 13

Related presentations


Other presentations created by Lindon

Databases
16. 10. 2007
0 views

Databases

wolbring1
08. 05. 2008
0 views

wolbring1

Occupational Noise
08. 05. 2008
0 views

Occupational Noise

Paper22
07. 05. 2008
0 views

Paper22

malignant hyperthermia
02. 05. 2008
0 views

malignant hyperthermia

mastitis
02. 05. 2008
0 views

mastitis

Chapter 3 lecture
02. 05. 2008
0 views

Chapter 3 lecture

habil final
02. 05. 2008
0 views

habil final

BIOSEC PDR
02. 05. 2008
0 views

BIOSEC PDR

Steps to PDR
02. 05. 2008
0 views

Steps to PDR

ancient china
10. 10. 2007
0 views

ancient china

Latin America 07
22. 10. 2007
0 views

Latin America 07

Super3 ApplytheBig6toK 2
11. 10. 2007
0 views

Super3 ApplytheBig6toK 2

tutorial coco
12. 10. 2007
0 views

tutorial coco

c115c905
13. 10. 2007
0 views

c115c905

Marina PartIII
16. 10. 2007
0 views

Marina PartIII

Harrison EgyptianWebQuest
21. 10. 2007
0 views

Harrison EgyptianWebQuest

20040616 blair
02. 10. 2007
0 views

20040616 blair

Consumer Health Compl
06. 12. 2007
0 views

Consumer Health Compl

599 Introduction
10. 10. 2007
0 views

599 Introduction

orizon2010
23. 10. 2007
0 views

orizon2010

Saul Hahn
25. 10. 2007
0 views

Saul Hahn

Guide to the Match 2007 FINAL
30. 10. 2007
0 views

Guide to the Match 2007 FINAL

U Fix It Workshop
07. 11. 2007
0 views

U Fix It Workshop

015 parker
19. 10. 2007
0 views

015 parker

yun MPLS
30. 10. 2007
0 views

yun MPLS

11029 2003
20. 11. 2007
0 views

11029 2003

Great Grains
21. 11. 2007
0 views

Great Grains

II homology
10. 10. 2007
0 views

II homology

basel
15. 10. 2007
0 views

basel

miele
03. 10. 2007
0 views

miele

pres4 7
31. 12. 2007
0 views

pres4 7

piero messina
04. 01. 2008
0 views

piero messina

ASBESTOS AWARENESS
04. 01. 2008
0 views

ASBESTOS AWARENESS

osmoregulation2
10. 10. 2007
0 views

osmoregulation2

Clim Application Water
07. 01. 2008
0 views

Clim Application Water

Accountability Foster
07. 01. 2008
0 views

Accountability Foster

145 9 new
07. 01. 2008
0 views

145 9 new

Fundraising AWNY2007
28. 09. 2007
0 views

Fundraising AWNY2007

VanBorm
12. 10. 2007
0 views

VanBorm

608uetic
24. 10. 2007
0 views

608uetic

SwissBCH
18. 10. 2007
0 views

SwissBCH

the superstring adventure
15. 10. 2007
0 views

the superstring adventure

winton
23. 10. 2007
0 views

winton

El Mozote
26. 02. 2008
0 views

El Mozote

don cote flh env conf
20. 03. 2008
0 views

don cote flh env conf

Shyama Bijapurkar
26. 03. 2008
0 views

Shyama Bijapurkar

Session 8 Meteorological Hazards
03. 10. 2007
0 views

Session 8 Meteorological Hazards

RiseofBigBusiness
27. 02. 2008
0 views

RiseofBigBusiness

bbhh107 presentation
26. 11. 2007
0 views

bbhh107 presentation

Arbitragepresentation
16. 04. 2008
0 views

Arbitragepresentation

holiday 2007
17. 04. 2008
0 views

holiday 2007

class8n4
22. 04. 2008
0 views

class8n4

mindful habits
11. 03. 2008
0 views

mindful habits

PraesentationAchtonl ine
07. 10. 2007
0 views

PraesentationAchtonl ine

12 Project02 05
04. 10. 2007
0 views

12 Project02 05

Balschmiter
05. 10. 2007
0 views

Balschmiter

DARPA NoD
08. 10. 2007
0 views

DARPA NoD

308
02. 05. 2008
0 views

308

200606INRIADREIen
13. 03. 2008
0 views

200606INRIADREIen

Organigrama actualizado 01
22. 10. 2007
0 views

Organigrama actualizado 01

Japan Outlook
25. 03. 2008
0 views

Japan Outlook

Inferring Main Ideas New
15. 10. 2007
0 views

Inferring Main Ideas New

Nutrients
07. 03. 2008
0 views

Nutrients

secession
17. 10. 2007
0 views

secession

L5PresentationFive
19. 10. 2007
0 views

L5PresentationFive

JIGSAW
23. 11. 2007
0 views

JIGSAW

fall
02. 11. 2007
0 views

fall

holland poodles
16. 11. 2007
0 views

holland poodles

niimoto
09. 10. 2007
0 views

niimoto

comment to Itai
07. 04. 2008
0 views

comment to Itai

L24 Sartorius
04. 01. 2008
0 views

L24 Sartorius

Power Point Final
02. 11. 2007
0 views

Power Point Final

Prof Thomas Meyer
17. 10. 2007
0 views

Prof Thomas Meyer

Bauer
15. 11. 2007
0 views

Bauer

PBritton
10. 04. 2008
0 views

PBritton

AST5220 2 print
15. 10. 2007
0 views

AST5220 2 print

PRESENTATIONISAAC
01. 11. 2007
0 views

PRESENTATIONISAAC

Willits FIA Program News 2007
08. 10. 2007
0 views

Willits FIA Program News 2007

15 Tauchi
09. 10. 2007
0 views

15 Tauchi

hedberg
19. 10. 2007
0 views

hedberg

Analyst briefing condenced
19. 10. 2007
0 views

Analyst briefing condenced

funcProg2
19. 10. 2007
0 views

funcProg2

28 C4 avispachaquetaamar
24. 10. 2007
0 views

28 C4 avispachaquetaamar