Macroeconomics Cours
LARGE ECONOMIES
FIXED EXCHANGE RATE REGIME
FF CURVE
How does y impact y*?
HH CURVE
How does y* impact y ?
Trade Balance Multiplier effect : if y increases --- q* increases --- y* increases
so FF curve is an increasing function
How does FF shift up?
for a given y, if dg* up / dM* up / de* up
Trade Balance multiplier effect : y* increases --- x (export of national country) increases --- y increases
Crowding out effect : y* increases --- Demand of $ increases --- r increases (negative impact on investments) --- y decreases
If dominating effect then HH upwards sloping curve
If domination effect then HH is a downwards sloping curve
SMALL ECONOMIES
FIXED EXCHANGE RATE REGIME
Basic interrelations
IS curve
q increases --- IS down
Appreciation --- q decreases
Basics :* "HH shows the variables which impact the output of the national country" / HH is in function of M because national country is the dominated country as it defends to parity
FLEXIBLE EXCHANGE RATE REGIME
Goods market
Balance of Trade
Determinants Imports : z=z(y+;q+ ) increases with y and increases with q / Exports : x=x (y*+ : q-)
Monetary Market
IS curve
LM curve
Foreign exchange market - Balance of payment
What happens when devaluation occurs (q decreases?)
Marshal Lerner condition : The balance of trade is a decreasing function of the real exchange rate if the sum of elasticity for imports and exports (in absolute value) is greater than one
when q decreases, valuation effect first BOP<0 / Volume effects appears later
Shifts to the left by dg>0 , dy*> 0 , dq < 0
Shift to the right by dMs > 0
Balance of Trade
Financial account
When Perfect Mobility of capital
When Imperfect Mobility of capital
r=r* - eâ
Note: equilibrium is achieved with the variation of e but the Fx market is stable when Marshall Lerner condition is satisfied :
Ex: is BOP <0 then excess of supply of £ leading to drop of Fx rate e to get BOP=0
B=0 curve ⚠
System ensures BOP = 0!! with adjustment of e
BOP < 0 then £ down - more x less z - BOP=0 back / BOP>0 then £ more - more z less z back to BOP=0
1) Determine the system of equations / Exo : P, M,g, y star ,r star, P star / Endo: y, r, e
Graphic representation : LM increasing, IS decreasing B=0 depending on mobility
2) Monetary Policy
a) Before adjustment of e / after adjustment of e - plus B=0 e in IS / put y and r on the left
Note: 🚩 In the trade balance - could be Marginal Propensity to import, just replace with the value
Determine the multiplier
Find multiplier before adjustment, when de=0
Explain the effect
dy <0 and dr >0
Contractionary dMs <0
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