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  • Is LM BP Analysis

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    api-3825580
    2K vizualizări40 pagini
    1) The document discusses ISLM analysis of open economies under fixed and floating exchange rates. 2) Under fixed exchange rates, an expansionary fiscal policy can cause a balance of payments deficit and the interest rate must rise to restore equilibrium. 3) Under floating exchange rates, an expansionary fiscal policy causes the exchange rate to appreciate, shifting the IS curve left and restoring equilibrium at a higher interest rate and output level.

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    1) The document discusses ISLM analysis of open economies under fixed and floating exchange rates. 2) Under fixed exchange rates, an expansionary fiscal policy can cause a balance of payments deficit and the interest rate must rise to restore equilibrium. 3) Under floating exchange rates, an expansionary fiscal policy causes the exchange rate to appreciate, shifting the IS curve left and restoring equilibrium at a higher interest rate and output level.

    Drepturi de autor:

    Attribution Non-Commercial (BY-NC)
    Descărcați ca PPT, PDF, TXT sau citiți online pe Scribd
    Indicator pentru conținut neadecvat
    2K vizualizări40 pagini

    Is LM BP Analysis

    Încărcat de

    api-3825580
    1) The document discusses ISLM analysis of open economies under fixed and floating exchange rates. 2) Under fixed exchange rates, an expansionary fiscal policy can cause a balance of payments deficit and the interest rate must rise to restore equilibrium. 3) Under floating exchange rates, an expansionary fiscal policy causes the exchange rate to appreciate, shifting the IS curve left and restoring equilibrium at a higher interest rate and output level.

    Drepturi de autor:

    Attribution Non-Commercial (BY-NC)
    Descărcați ca PPT, PDF, TXT sau citiți online pe Scribd
    Indicator pentru conținut neadecvat
    din 40

    ISLM Analysis of

    the Open Economy


    (ISLMBP Analysis)
    ISLMBP analysis: fixed exchange rates

    Fixed exchange rates:


    The BP curve
    ISLMBP analysis: fixed exchange rates
    r

    BP

    SURPLUS
    r1
    DEFICIT

    O
    Y
    ISLMBP analysis: fixed exchange rates
    r

    SURPLUS BP

    DEFICIT

    O Y1 Y
    ISLMBP analysis: fixed exchange rates
    r

    BP

    a
    r1

    O Y1 Y
    ISLMBP analysis: fixed exchange rates
    r
    Assume that national
    income rises
    BP

    a
    r1

    O Y1 Y1 Y
    ISLMBP analysis: fixed exchange rates
    r
    Assume that national
    income rises
    BP

    a b
    r1 Deficit if rate of interest
    remains at r1

    O Y1 Y1 Y
    ISLMBP analysis: fixed exchange rates
    r

    BP
    c
    r2
    a
    r1 Rate of interest must
    rise to r2 to restore
    balance of payments

    O Y1 Y1 Y
    ISLMBP analysis: fixed exchange rates

    Full equilibrium in the


    goods, money and
    foreign exchange
    markets
    ISLMBP analysis: fixed exchange rates
    r LM

    BP

    a
    r1

    IS

    O Y1
    Y
    Full equilibrium in the goods, money
    and foreign exchange markets
    ISLMBP analysis: fixed exchange rates

    Effect of an expansionary
    fiscal policy
    under fixed
    exchange rates
    ISLMBP analysis: fixed exchange rates
    r LM1

    b
    r2 BP

    a
    r1

    IS2

    IS1

    O Y1 Y2 Y
    An expansionary fiscal policy
    ISLMBP analysis: fixed exchange rates
    r LM1

    b
    r2 BP

    Balance of payments
    a
    r1 surplus causes money
    supply to expand

    IS2

    IS1

    O Y1 Y2 Y
    An expansionary fiscal policy
    ISLMBP analysis: fixed exchange rates
    r LM1
    LM2

    b
    r2 BP
    c
    r3
    a Restoration of
    r1 full equilibrium

    IS2

    IS1

    O Y1 Y2 Y3 Y
    An expansionary fiscal policy
    ISLMBP analysis: fixed exchange rates
    r BP

    LM1

    a
    r1

    IS2

    IS1

    O Y1
    Y
    An expansionary fiscal policy:
    BP curve steeper than LM curve
    ISLMBP analysis: fixed exchange rates
    r BP

    LM1

    b
    r2
    a
    r1

    IS2

    IS1

    O Y1 Y2 Y
    An expansionary fiscal policy:
    BP curve steeper than LM curve
    ISLMBP analysis: fixed exchange rates
    r BP

    LM1

    b
    r2 Balance of payments
    a deficit causes money
    r1 supply to contract

    IS2

    IS1

    O Y1 Y2 Y
    An expansionary fiscal policy:
    BP curve steeper than LM curve
    ISLMBP analysis: fixed exchange rates
    r BP LM2

    LM1
    c
    r3
    b
    r2
    Restoration of
    a
    r1 full equilibrium

    IS2

    IS1

    O Y1 Y3 Y2 Y
    An expansionary fiscal policy:
    BP curve steeper than LM curve
    ISLMBP analysis: fixed exchange rates

    Effect of an expansionary
    monetary policy
    under fixed exchange
    rates
    ISLMBP analysis: fixed exchange rates
    r LM1

    BP

    a
    r1

    IS

    O Y1 Y
    An expansionary monetary policy
    ISLMBP analysis: fixed exchange rates
    r LM1
    LM2

    BP

    a
    r1
    b
    r2

    IS

    O Y1 Y2 Y
    An expansionary monetary policy
    ISLMBP analysis: fixed exchange rates
    r LM1
    LM2

    BP

    a
    r1 Balance of payments
    b deficit causes money
    r2
    supply to contract again

    IS

    O Y1 Y2 Y
    An expansionary monetary policy
    ISLMBP analysis: fixed exchange rates
    r LM1
    LM2

    BP

    a
    r1 Full equilibrium
    b is restored
    r2
    back at point a

    IS

    O Y1 Y2 Y
    An expansionary monetary policy
    ISLMBP analysis: fixed exchange rates

    Floating exchange rates:


    The BP curve
    ISLMBP analysis: floating exchange rates
    r
    Appreciation
    SURPLUS

    BP

    O
    Y
    ISLMBP analysis: floating exchange rates
    r

    BP

    Depreciation
    DEFICIT

    O
    Y
    ISLMBP analysis: fixed exchange rates

    Effect of an expansionary
    fiscal policy
    under floating
    exchange rates
    ISLMBP analysis: floating exchange rates
    r
    LM

    b
    r2 BP

    a
    r1

    IS2

    IS1

    O Y1 Y2 Y
    An expansionary fiscal policy
    ISLMBP analysis: floating exchange rates
    r
    LM

    b
    r2 BP

    a
    r1

    IS1 IS2
    Balance of payments
    surplus causes the
    exchange rate to appreciate

    O Y1 Y2 Y
    An expansionary fiscal policy
    ISLMBP analysis: floating exchange rates
    r
    LM

    b
    r2 BP
    The appreciation
    a causes the IS curve
    r1
    to shift to the left

    IS1 IS2

    O Y1 Y2 Y
    An expansionary fiscal policy
    ISLMBP analysis: floating exchange rates
    r
    LM

    b BP2
    r2 BP1
    c
    r3
    Full equilibrium is
    a
    r1 restored at point c

    IS2

    IS3
    IS1
    O Y1 Y3 Y2 Y
    An expansionary fiscal policy
    ISLMBP analysis: floating exchange rates
    r
    BP1

    LM

    r2 b
    a
    r1

    IS2
    IS1
    O Y1 Y2 Y
    An expansionary fiscal policy:
    BP curve steeper than LM curve
    ISLMBP analysis: floating exchange rates
    r
    BP1

    LM

    r2 b
    a Balance of payments
    r1 deficit causes exchange
    rate to depreciate

    IS2
    IS1
    O Y1 Y2 Y
    An expansionary fiscal policy:
    BP curve steeper than LM curve
    ISLMBP analysis: floating exchange rates
    r
    BP1

    LM

    r2 b Depreciation causes
    a
    r1 the IS curve to
    shift to the right

    IS2
    IS1
    O Y1 Y2 Y
    An expansionary fiscal policy:
    BP curve steeper than LM curve
    ISLMBP analysis: floating exchange rates
    r
    BP1
    BP2

    LM
    r3 c
    b Full equilibrium is
    r2 a
    r1 achieved at point c

    IS3

    IS2
    IS1
    O Y1 Y2 Y3 Y
    An expansionary fiscal policy:
    BP curve steeper than LM curve
    ISLMBP analysis: fixed exchange rates

    Effect of an expansionary
    monetary policy
    under floating
    exchange rates
    ISLMBP analysis: floating exchange rates
    r
    LM1
    LM2

    BP1

    a
    r1

    r2 b

    IS1
    O Y1 Y2 Y
    An expansionary monetary policy
    ISLMBP analysis: floating exchange rates
    r
    LM1
    LM2

    BP1

    a
    r1
    The balance of payments
    r2 b deficit causes the BP line
    to shift downward

    IS1
    O Y1 Y2 Y
    An expansionary monetary policy
    ISLMBP analysis: floating exchange rates
    r
    LM1
    LM2

    BP1

    a
    r1
    The depreciation
    r2 b causes the IS curve
    to shift to the right

    IS1
    O Y1 Y2 Y
    An expansionary monetary policy
    ISLMBP analysis: floating exchange rates
    r
    LM1
    LM2

    BP1

    a BP2
    r1
    c
    r3
    r2 b Full equilibrium is
    restored at point c

    IS2
    IS1
    O Y1 Y2 Y3 Y
    An expansionary monetary policy

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