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1、Chapter Eight：,How Does the Open Macroeconomy Work?,一、The Performance of A National Macroeconomic,1、Internal BalanceFull employment,or an acceptably low unemployment rateThe economys production grows over time.Price stability,or an acceptably low inflation rate,2、External balanceThe achievement of a
2、 reasonable and sustainable balance of payments with the rest of the worldUseful indicator:Official settlements balance approximately equal to zero(so that the country is not losing official international reserves or acquiring unwanted official international reserves),二、A framework for Macroeconomic
3、 analysis,1.Domestic production depends on aggregate demand Y=AD=C+Id+G+(X-M)National expenditures(E):E=C+Id+G C=C(Y)Id=Id(i)(other influences as a source of shocks to the economy),2.Trade depends on income the volume of a nations imports depends positively on the level of real national income or pr
4、oduction.M=M(Y)Assume that export volumes are independent of this countrys national income.,3.Equilibrium GDPAssume:all price and pricelike variables are constant.Y=AD(Y)=E(Y)+X-M(Y)(Y-C-G)=(E-C-G)+(X-M)or S=Id+(X-M)=Id+IfFigure 8.1-Equilibrium Domestic Production,Figure 8.1-Equilibrium Domestic Pro
5、duction,4.The spending Multiplier in a small,open EconomyWhen national spending rises in an economy,this extra spending sets off a multiplier process of expansion of domestic production and income.The marginal propensity to save(s)The marginal propensity to import(m)The marginal propensity to consum
6、e domestic product(1-s-m),The spending multiplier for a small open economy is Y=G+(1-s-m)Y Y(1-1+s+m)=G Y/G=1/(s+m),The value of this multiplier is the same whether the initial extra spending is made by the government or a surge in consumption,a rise in private investment spending,or a rise in expor
7、ts.The value of this multiplier is smaller in a small open economy than the multiplier in a closed economy.Imports rose but exports constant for this small country,the countrys trade balance thus deteriorates.,5.Foreign-Income Repercussionswhen a large nations extra spending leads to extra imports,t
8、hese imports noticeably raise foreign incomes and create foreign jobs.The more our countrys imports affect foreign incomes,and the more the foreign countries have a propensity to import from our country,the more our true spending multiplier exceeds the simple formula 1/(s+m),Figure 8.2Foreign Trade
9、and Income Repercussions,Figure 8.3(p203)The bigger the country,the more its spending tends to affect other countries.The importance of close trading ties is also evident in the large effect.,三、A more complete framework:three markets,Mundell-Fleming model,Figure 8.3Overview of Macromodel,1.The Domes
10、tic Product Market the IS curve shows all combinations of domestic product levels and interest rates for which the domestic product market is in equilibrium.S(Y)=Id(i)+X M(Y),+,+,-,The higher the interest rate,the lower the level of domestic product that is consistent with it.Changes in any influenc
11、e other than interest rates that can directly affect aggregate demand cause a shift in the IS curve.,Figure 8.4IS Curve,2.The Money MarketThe demand for(nominal)money L L=L(PY,i)The equilibrium between money supply Ms and money demand Ms=L(PY,i)The LM curve shows all combinations of production level
12、s and interest rates for which the money market is in equilibrium.,+,-,-,+,Figure 8.5LM Curve,3.The foreign exchange market(or balance of Payments B=CA(Y)+KA(i)The FE curve shows the set of all interest and production combinations in our country that result in a zero value for the countrys official
13、settlements balance.Like the LM curve,slopes upward.,+,-,How does the slope of the FE curve compare to the LM curve?It depends on how responsive money demand and the balance of payments are to changes in the interest rate and domestic product.If capital flows are very sensitive to interest rates,the
14、 FE curve is relatively flat.exogenous forces shifts the FE curve.,Figure 8.6FE Curve,4.Three markets togetherThe official settlements balance is in surplus if the IS-LM intersection is to the left of the FE curve.The official settlements balance is zero if the IS-LM intersection is on the FE curve.
15、The official settlements balance is in deficit if the IS-LM intersection is to the right of the FE curve.,四、The price level does change,1.The price level does change over time for three basic reasons:Most countries have some amount of ongoing inflation.Strong or weak aggregate demand can put pressur
16、e on the countrys price level.Shocks occasionally can cause large changes in the price level even in the short run.,2.Trade also depends on price competitivenessThe demand for imports has two major determinants:M=M(Y,Pf e/P)The demand for exports has two major determinants:X=X(Yf,Pf e/P),+,-,+,+,Our
17、 international price competitiveness improvesif the foreign-currency price of foreign substitute products(Pf)is higher,orif the domestic-currency price of our products(P)is lower,or if the nominal exchange rate value of our currency is lower(e is higher).Over time,the foreign inflation rate is highe
18、r,our inflation rate is lower,or our currency appreciates less(or depreciates more).,A change in international price competitiveness shifts two curves:the FE and the IS curves.,Summary,Internal balance and external balanceA framework for Macroeconomic analysis Y=AD(Y)=E(Y)+X-M(Y)The spending multiplier for a small open economy is Y/G=1/(s+m)Foreign-Income RepercussionsMundell-Fleming model:three markets equilibriumThe price level changes：Trade depends on price competitiveness,
