International Economics
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Dominick-Salvatore-International-Economics
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+ X = S + M (18-1) I + X + G = S + M + T (18-2) Government expenditures (G), just like investments (I) and exports (X), are injections into the system, while taxes (T), just like savings (S) and imports (M), are a leakage from the system. Equation (18-2) can also be rearranged as (G − T ) = (S − I ) + (M − X ) (18-3) which postulates that a government budget deficit (G > T) must be financed by an excess of S over I and/or an excess of M over X (see Case Study 18-1). Expansionary fiscal policy refers to an increase in (G − T), and this can be accomplished with an increase in G, a reduction in T , or both. Contractionary fiscal policy refers to the opposite. Monetary policy involves a change in the nation’s money supply that affects domestic interest rates. Monetary policy is easy if the money supply is increased and interest rates fall. This induces an increase in the level of investment and income in the nation (through the multiplier process) and induces imports to rise. At the same time, the reduction in the interest rate induces a short-term capital outflow or reduced inflow. On the other hand, tight monetary policy refers to a reduction in the nation’s money supply and a rise in the interest rate. This discourages investment, income, and imports, and also leads to a short-term capital inflow or reduced outflow. (continued) ■ CASE STUDY 18-1 Government, Private-Sector, and Current Account Balances in the G-7 Countries Table 18.1 shows the average government balance (G – T), the private-sector balance (S – I), and the trade or current account balance (X – M) as a percentage of GDP for the G-7 countries over the 1996–2000 period and their values in 2001. From the table we see that Equation (18-3) (slightly reformulated) holds. For example, for the United States in 2001, T – G = 0.6 (a budget surplus). Therefore, G – T = –0.6 is equal to S – I = –4.7 plus M – X or minus X – M = – (−4.1) = +4.1. Thus, we have –0.6 = –4.7 + 4.1. The table shows that Japan had the largest budget deficit and the largest private-sector and current account surpluses over the 1996–2001 period among the G-7 countries, while the United States had the largest private balance and current account deficit. Salvatore c18.tex V2 - 11/02/2012 7:37 A.M. Page 575 18.1 Introduction 575 ■ CASE STUDY 18-1 Continued ■ TABLE 18.1. Government, Private-Sector, and Current Account Balances as a Percentage of GDP in the G-7 Countries, 1996–2001 Government Private-Sector Current Account Balances Balances Balances 1996–2000 1996–2000 1996–2000 Country Average 2001 Average 2001 Average 2001 United States −0.1 0 .6 −2.7 −4.7 −2.7 −4.1 Japan −5.6 −6.4 7 .9 8 .5 2 .3 2 .1 Germany −1.7 −2.5 1 .2 1 .8 −0.6 −0.7 United Kingdom −0.6 1 .1 −0.6 −2.9 −1.2 −1.8 France −2.6 −1.5 4 Download 7.1 Mb. Do'stlaringiz bilan baham: |
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