ISLM Analysis of the Open Economy (ISLMBP Analysis)
-
Upload
shon-pierce -
Category
Documents
-
view
234 -
download
0
Transcript of ISLM Analysis of the Open Economy (ISLMBP Analysis)
![Page 1: ISLM Analysis of the Open Economy (ISLMBP Analysis)](https://reader030.fdocuments.us/reader030/viewer/2022033103/56649e4d5503460f94b42e30/html5/thumbnails/1.jpg)
ISLMISLM Analysis of Analysis ofthe Open Economythe Open Economy((ISLMBP ISLMBP Analysis)Analysis)
![Page 2: ISLM Analysis of the Open Economy (ISLMBP Analysis)](https://reader030.fdocuments.us/reader030/viewer/2022033103/56649e4d5503460f94b42e30/html5/thumbnails/2.jpg)
ISLMBP analysis: fixed exchange ratesISLMBP analysis: fixed exchange rates
Fixed exchange rates:The BP curve
Fixed exchange rates:The BP curve
![Page 3: ISLM Analysis of the Open Economy (ISLMBP Analysis)](https://reader030.fdocuments.us/reader030/viewer/2022033103/56649e4d5503460f94b42e30/html5/thumbnails/3.jpg)
O
r
Y
r1
SURPLUS
DEFICIT
BP
ISLMBP analysis: fixed exchange ratesISLMBP analysis: fixed exchange rates
![Page 4: ISLM Analysis of the Open Economy (ISLMBP Analysis)](https://reader030.fdocuments.us/reader030/viewer/2022033103/56649e4d5503460f94b42e30/html5/thumbnails/4.jpg)
O
r
Y
SURPLUS
DEFICIT
Y1
BP
ISLMBP analysis: fixed exchange ratesISLMBP analysis: fixed exchange rates
![Page 5: ISLM Analysis of the Open Economy (ISLMBP Analysis)](https://reader030.fdocuments.us/reader030/viewer/2022033103/56649e4d5503460f94b42e30/html5/thumbnails/5.jpg)
O
r
Y
r1
Y1
a
BP
ISLMBP analysis: fixed exchange ratesISLMBP analysis: fixed exchange rates
![Page 6: ISLM Analysis of the Open Economy (ISLMBP Analysis)](https://reader030.fdocuments.us/reader030/viewer/2022033103/56649e4d5503460f94b42e30/html5/thumbnails/6.jpg)
O
r
Y
r1
Y1
a
Assume that nationalincome rises
Y1
BP
ISLMBP analysis: fixed exchange ratesISLMBP analysis: fixed exchange rates
![Page 7: ISLM Analysis of the Open Economy (ISLMBP Analysis)](https://reader030.fdocuments.us/reader030/viewer/2022033103/56649e4d5503460f94b42e30/html5/thumbnails/7.jpg)
O
r
Y
r1
Y1
a
Y1
Assume that nationalincome rises
Deficit if rate of interestremains at r1
b
BP
ISLMBP analysis: fixed exchange ratesISLMBP analysis: fixed exchange rates
![Page 8: ISLM Analysis of the Open Economy (ISLMBP Analysis)](https://reader030.fdocuments.us/reader030/viewer/2022033103/56649e4d5503460f94b42e30/html5/thumbnails/8.jpg)
O
r
Y
r1
Y1
a
Y1
Rate of interest mustrise to r2 to restore
balance of payments
cr2
BP
ISLMBP analysis: fixed exchange ratesISLMBP analysis: fixed exchange rates
![Page 9: ISLM Analysis of the Open Economy (ISLMBP Analysis)](https://reader030.fdocuments.us/reader030/viewer/2022033103/56649e4d5503460f94b42e30/html5/thumbnails/9.jpg)
ISLMBP analysis: fixed exchange ratesISLMBP analysis: fixed exchange rates
Full equilibrium in thegoods, money andforeign exchange
markets
Full equilibrium in thegoods, money andforeign exchange
markets
![Page 10: ISLM Analysis of the Open Economy (ISLMBP Analysis)](https://reader030.fdocuments.us/reader030/viewer/2022033103/56649e4d5503460f94b42e30/html5/thumbnails/10.jpg)
O
r
Y
BP
LM
IS
r1
Y1
Full equilibrium in the goods, moneyFull equilibrium in the goods, moneyand foreign exchange marketsand foreign exchange markets
ISLMBP analysis: fixed exchange ratesISLMBP analysis: fixed exchange rates
a
![Page 11: ISLM Analysis of the Open Economy (ISLMBP Analysis)](https://reader030.fdocuments.us/reader030/viewer/2022033103/56649e4d5503460f94b42e30/html5/thumbnails/11.jpg)
ISLMBP analysis: fixed exchange ratesISLMBP analysis: fixed exchange rates
Effect of an expansionaryfiscal policyunder fixed
exchange rates
Effect of an expansionaryfiscal policyunder fixed
exchange rates
![Page 12: ISLM Analysis of the Open Economy (ISLMBP Analysis)](https://reader030.fdocuments.us/reader030/viewer/2022033103/56649e4d5503460f94b42e30/html5/thumbnails/12.jpg)
ISLMBP analysis: fixed exchange ratesISLMBP analysis: fixed exchange rates
O
r
Y
BP
LM1
IS1
r1
Y1
An expansionary fiscal policyAn expansionary fiscal policy
IS2
a
r2
Y2
b
![Page 13: ISLM Analysis of the Open Economy (ISLMBP Analysis)](https://reader030.fdocuments.us/reader030/viewer/2022033103/56649e4d5503460f94b42e30/html5/thumbnails/13.jpg)
O
r
Y
BP
LM1
IS1
ar1
Y1
An expansionary fiscal policyAn expansionary fiscal policy
IS2
r2
b
Y2
Balance of paymentssurplus causes money
supply to expand
ISLMBP analysis: fixed exchange ratesISLMBP analysis: fixed exchange rates
![Page 14: ISLM Analysis of the Open Economy (ISLMBP Analysis)](https://reader030.fdocuments.us/reader030/viewer/2022033103/56649e4d5503460f94b42e30/html5/thumbnails/14.jpg)
O
r
Y
BP
LM1
IS1
ar1
Y1
An expansionary fiscal policyAn expansionary fiscal policy
IS2
r2
b
Y2
Restoration of
full equilibrium
LM2
r3
Y3
c
ISLMBP analysis: fixed exchange ratesISLMBP analysis: fixed exchange rates
![Page 15: ISLM Analysis of the Open Economy (ISLMBP Analysis)](https://reader030.fdocuments.us/reader030/viewer/2022033103/56649e4d5503460f94b42e30/html5/thumbnails/15.jpg)
O
r
Y
BP
LM1
IS1
r1
Y1
An expansionary fiscal policy:An expansionary fiscal policy:BPBP curve steeper than curve steeper than LMLM curve curve
IS2
a
ISLMBP analysis: fixed exchange ratesISLMBP analysis: fixed exchange rates
![Page 16: ISLM Analysis of the Open Economy (ISLMBP Analysis)](https://reader030.fdocuments.us/reader030/viewer/2022033103/56649e4d5503460f94b42e30/html5/thumbnails/16.jpg)
a
O
r
Y
BP
LM1
IS1
r1
Y1
An expansionary fiscal policy:An expansionary fiscal policy:BPBP curve steeper than curve steeper than LMLM curve curve
IS2
r2
b
Y2
ISLMBP analysis: fixed exchange ratesISLMBP analysis: fixed exchange rates
![Page 17: ISLM Analysis of the Open Economy (ISLMBP Analysis)](https://reader030.fdocuments.us/reader030/viewer/2022033103/56649e4d5503460f94b42e30/html5/thumbnails/17.jpg)
O
r
Y
BP
LM1
IS1
r1
Y1
An expansionary fiscal policy:An expansionary fiscal policy:BPBP curve steeper than curve steeper than LMLM curve curve
IS2
a
r2
b
Y2
Balance of paymentsdeficit causes money
supply to contract
ISLMBP analysis: fixed exchange ratesISLMBP analysis: fixed exchange rates
![Page 18: ISLM Analysis of the Open Economy (ISLMBP Analysis)](https://reader030.fdocuments.us/reader030/viewer/2022033103/56649e4d5503460f94b42e30/html5/thumbnails/18.jpg)
O
r
Y
BP
LM1
IS1
r1
Y1
An expansionary fiscal policy:An expansionary fiscal policy:BPBP curve steeper than curve steeper than LMLM curve curve
IS2
a
r2
b
Y2
Restoration of
full equilibrium
LM2
r3
Y3
c
ISLMBP analysis: fixed exchange ratesISLMBP analysis: fixed exchange rates
![Page 19: ISLM Analysis of the Open Economy (ISLMBP Analysis)](https://reader030.fdocuments.us/reader030/viewer/2022033103/56649e4d5503460f94b42e30/html5/thumbnails/19.jpg)
ISLMBP analysis: fixed exchange ratesISLMBP analysis: fixed exchange rates
Effect of an expansionarymonetary policy
under fixed exchange rates
Effect of an expansionarymonetary policy
under fixed exchange rates
![Page 20: ISLM Analysis of the Open Economy (ISLMBP Analysis)](https://reader030.fdocuments.us/reader030/viewer/2022033103/56649e4d5503460f94b42e30/html5/thumbnails/20.jpg)
O
r
Y
BP
LM1
IS
ar1
Y1
An expansionary monetary policyAn expansionary monetary policy
ISLMBP analysis: fixed exchange ratesISLMBP analysis: fixed exchange rates
![Page 21: ISLM Analysis of the Open Economy (ISLMBP Analysis)](https://reader030.fdocuments.us/reader030/viewer/2022033103/56649e4d5503460f94b42e30/html5/thumbnails/21.jpg)
O
r
Y
BP
LM1
IS
ar1
Y1
An expansionary monetary policyAn expansionary monetary policy
LM2
Y2
r2
b
ISLMBP analysis: fixed exchange ratesISLMBP analysis: fixed exchange rates
![Page 22: ISLM Analysis of the Open Economy (ISLMBP Analysis)](https://reader030.fdocuments.us/reader030/viewer/2022033103/56649e4d5503460f94b42e30/html5/thumbnails/22.jpg)
O
r
Y
BP
LM1
IS
ar1
Y1
An expansionary monetary policyAn expansionary monetary policy
Y2
LM2
r2
bBalance of paymentsdeficit causes money
supply to contract again
ISLMBP analysis: fixed exchange ratesISLMBP analysis: fixed exchange rates
![Page 23: ISLM Analysis of the Open Economy (ISLMBP Analysis)](https://reader030.fdocuments.us/reader030/viewer/2022033103/56649e4d5503460f94b42e30/html5/thumbnails/23.jpg)
O
r
Y
BP
LM1
IS
ar1
Y1
An expansionary monetary policyAn expansionary monetary policy
Y2
LM2
r2
bFull equilibrium
is restoredback at point a
ISLMBP analysis: fixed exchange ratesISLMBP analysis: fixed exchange rates
![Page 24: ISLM Analysis of the Open Economy (ISLMBP Analysis)](https://reader030.fdocuments.us/reader030/viewer/2022033103/56649e4d5503460f94b42e30/html5/thumbnails/24.jpg)
ISLMBP analysis: fixed exchange ratesISLMBP analysis: fixed exchange rates
Floating exchange rates:The BP curve
Floating exchange rates:The BP curve
![Page 25: ISLM Analysis of the Open Economy (ISLMBP Analysis)](https://reader030.fdocuments.us/reader030/viewer/2022033103/56649e4d5503460f94b42e30/html5/thumbnails/25.jpg)
O
r
Y
BP
SURPLUS
ISLMBP analysis: floating exchange ratesISLMBP analysis: floating exchange rates
Appreciation
![Page 26: ISLM Analysis of the Open Economy (ISLMBP Analysis)](https://reader030.fdocuments.us/reader030/viewer/2022033103/56649e4d5503460f94b42e30/html5/thumbnails/26.jpg)
O
r
Y
BP
DEFICIT
Depreciation
ISLMBP analysis: floating exchange ratesISLMBP analysis: floating exchange rates
![Page 27: ISLM Analysis of the Open Economy (ISLMBP Analysis)](https://reader030.fdocuments.us/reader030/viewer/2022033103/56649e4d5503460f94b42e30/html5/thumbnails/27.jpg)
ISLMBP analysis: fixed exchange ratesISLMBP analysis: fixed exchange rates
Effect of an expansionaryfiscal policy
under floatingexchange rates
Effect of an expansionaryfiscal policy
under floatingexchange rates
![Page 28: ISLM Analysis of the Open Economy (ISLMBP Analysis)](https://reader030.fdocuments.us/reader030/viewer/2022033103/56649e4d5503460f94b42e30/html5/thumbnails/28.jpg)
O
r
Y
BP
LM
IS1
Y1
An expansionary fiscal policyAn expansionary fiscal policy
IS2
Y2
r1
r2
b
a
ISLMBP analysis: floating exchange ratesISLMBP analysis: floating exchange rates
![Page 29: ISLM Analysis of the Open Economy (ISLMBP Analysis)](https://reader030.fdocuments.us/reader030/viewer/2022033103/56649e4d5503460f94b42e30/html5/thumbnails/29.jpg)
O
r
Y
BP
LM
IS1
Y1
An expansionary fiscal policyAn expansionary fiscal policy
IS2
a
Y2
r1
r2
b
Balance of paymentssurplus causes the
exchange rate to appreciate
ISLMBP analysis: floating exchange ratesISLMBP analysis: floating exchange rates
![Page 30: ISLM Analysis of the Open Economy (ISLMBP Analysis)](https://reader030.fdocuments.us/reader030/viewer/2022033103/56649e4d5503460f94b42e30/html5/thumbnails/30.jpg)
O
r
Y
BP
LM
IS1
Y1
An expansionary fiscal policyAn expansionary fiscal policy
IS2
a
Y2
r1
r2
b
The appreciationcauses the IS curve
to shift to the left
ISLMBP analysis: floating exchange ratesISLMBP analysis: floating exchange rates
![Page 31: ISLM Analysis of the Open Economy (ISLMBP Analysis)](https://reader030.fdocuments.us/reader030/viewer/2022033103/56649e4d5503460f94b42e30/html5/thumbnails/31.jpg)
O
r
Y
BP1
LM
IS1
Y1
An expansionary fiscal policyAn expansionary fiscal policy
IS2
a
Y2
r1
r2
b
Full equilibrium isrestored at point c
BP2
IS3
Y3
r3
c
ISLMBP analysis: floating exchange ratesISLMBP analysis: floating exchange rates
![Page 32: ISLM Analysis of the Open Economy (ISLMBP Analysis)](https://reader030.fdocuments.us/reader030/viewer/2022033103/56649e4d5503460f94b42e30/html5/thumbnails/32.jpg)
O
r
Y
LM
BP1
IS1
Y1
An expansionary fiscal policy:An expansionary fiscal policy:BPBP curve steeper than curve steeper than LMLM curve curve
ar1
IS2
Y2
r2b
ISLMBP analysis: floating exchange ratesISLMBP analysis: floating exchange rates
![Page 33: ISLM Analysis of the Open Economy (ISLMBP Analysis)](https://reader030.fdocuments.us/reader030/viewer/2022033103/56649e4d5503460f94b42e30/html5/thumbnails/33.jpg)
O
r
Y
LM
BP1
IS1
Y1
An expansionary fiscal policy:An expansionary fiscal policy:BPBP curve steeper than curve steeper than LMLM curve curve
a
Y2
r1
r2b
IS2
Balance of paymentsdeficit causes exchange
rate to depreciate
ISLMBP analysis: floating exchange ratesISLMBP analysis: floating exchange rates
![Page 34: ISLM Analysis of the Open Economy (ISLMBP Analysis)](https://reader030.fdocuments.us/reader030/viewer/2022033103/56649e4d5503460f94b42e30/html5/thumbnails/34.jpg)
O
r
Y
LM
BP1
IS1
Y1
An expansionary fiscal policy:An expansionary fiscal policy:BPBP curve steeper than curve steeper than LMLM curve curve
a
Y2
r1
r2b
IS2
Depreciation causesthe IS curve toshift to the right
ISLMBP analysis: floating exchange ratesISLMBP analysis: floating exchange rates
![Page 35: ISLM Analysis of the Open Economy (ISLMBP Analysis)](https://reader030.fdocuments.us/reader030/viewer/2022033103/56649e4d5503460f94b42e30/html5/thumbnails/35.jpg)
O
r
Y
LM
BP1
IS1
Y1
An expansionary fiscal policy:An expansionary fiscal policy:BPBP curve steeper than curve steeper than LMLM curve curve
IS3
a
Y2
r1
r2b
BP2
IS2
Y3
r3c
Full equilibrium isachieved at point c
ISLMBP analysis: floating exchange ratesISLMBP analysis: floating exchange rates
![Page 36: ISLM Analysis of the Open Economy (ISLMBP Analysis)](https://reader030.fdocuments.us/reader030/viewer/2022033103/56649e4d5503460f94b42e30/html5/thumbnails/36.jpg)
ISLMBP analysis: fixed exchange ratesISLMBP analysis: fixed exchange rates
Effect of an expansionarymonetary policyunder floating
exchange rates
Effect of an expansionarymonetary policyunder floating
exchange rates
![Page 37: ISLM Analysis of the Open Economy (ISLMBP Analysis)](https://reader030.fdocuments.us/reader030/viewer/2022033103/56649e4d5503460f94b42e30/html5/thumbnails/37.jpg)
O
r
Y
LM1
IS1
Y1
An expansionary monetary policyAn expansionary monetary policy
a
Y2
r1
r2
BP1
LM2
b
ISLMBP analysis: floating exchange ratesISLMBP analysis: floating exchange rates
![Page 38: ISLM Analysis of the Open Economy (ISLMBP Analysis)](https://reader030.fdocuments.us/reader030/viewer/2022033103/56649e4d5503460f94b42e30/html5/thumbnails/38.jpg)
O
r
Y
LM1
IS1
Y1
An expansionary monetary policyAn expansionary monetary policy
a
Y2
r1
r2 b
The balance of paymentsdeficit causes the BP line
to shift downward
BP1
LM2
ISLMBP analysis: floating exchange ratesISLMBP analysis: floating exchange rates
![Page 39: ISLM Analysis of the Open Economy (ISLMBP Analysis)](https://reader030.fdocuments.us/reader030/viewer/2022033103/56649e4d5503460f94b42e30/html5/thumbnails/39.jpg)
O
r
Y
LM1
IS1
Y1
An expansionary monetary policyAn expansionary monetary policy
a
Y2
r1
r2 b
The depreciationcauses the IS curveto shift to the right
BP1
LM2
ISLMBP analysis: floating exchange ratesISLMBP analysis: floating exchange rates
![Page 40: ISLM Analysis of the Open Economy (ISLMBP Analysis)](https://reader030.fdocuments.us/reader030/viewer/2022033103/56649e4d5503460f94b42e30/html5/thumbnails/40.jpg)
O
r
Y
BP2
LM1
IS1
Y1
An expansionary monetary policyAn expansionary monetary policy
a
Y2
r1
r2 b Full equilibrium isrestored at point c
BP1
IS2
Y3
r3
LM2
c
ISLMBP analysis: floating exchange ratesISLMBP analysis: floating exchange rates