International Economics
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Dominick-Salvatore-International-Economics
Problem Starting from point E on the LM curve in panel I, trace (i.e., pencil in) in each
of the four panels of Figure 18.14 the effect of (a) an easy monetary policy that increases the nation’s money supply by 100, on the assumption that the entire increase in the money supply will be held for transaction purposes, and (b) a depreciation that shifts the MT function down by 200 in panel II, on the assumption that monetary authorities keep MS at 800. (c) What happens if instead monetary authorities increase MS by 200 to MS = 1000 in part (b)? A18.3 Derivation of the BP Curve The four panels of Figure 18.14 are used to derive the BP curve in panel I. The BP curve shows the various combinations of interest rates and national income at which the nation’s balance of payments is in equilibrium. In panel II, the trade balance (X − M ) from the bottom panel of Figure 17.3 is plotted as a decreasing function of national income. The 45 ◦ line in panel III shows the external equilibrium condition that a balance-of-trade deficit be matched by an equal net short-term capital inflow , or a balance-of-trade surplus be equal to a net short-term capital outflow . Panel IV shows net short-term capital inflows (SC ) as an increasing function of the interest rate in the nation (and interest differential in favor of the nation on the assumption of con- stant interest rates abroad). For example, at Y E = 1000, X − M = 0 = SC at i = 5.0%. This defines point E in panel I. Similarly, at Y F = 1500, X − M = −75 and SC = +75 (so that X − M + SC = 0) at i = 8.0%. This defines point F in panel I. By joining points E and F , we derive the BP curve in panel I and in Figure 18.2. Note that at Y < Y E , X − M > 0 and SC < 0 (i.e., there is a net capital outflow from the nation), so that X − M + SC = 0 and we get another point on the FE curve below point E . The BP curve is drawn on the assumption that the exchange rate is fixed. A depreciation or devaluation from a condition of less than full employment in the nation shifts the X − M function up and improves the nation’s trade balance at each level of income so that a smaller net short-term capital inflow (or an even greater outflow) is needed at a lower i to keep the balance of payments in equilibrium (i.e., the BP curve shifts down in panel I). Download 7.1 Mb. Do'stlaringiz bilan baham: |
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