Welcome to Scribd, the world's digital library. Read, publish, and share books and documents. See more
Standard view
Full view
of .
Save to My Library
Look up keyword
Like this
0 of .
Results for:
No results containing your search query
P. 1
Is-LM Open Economy

Is-LM Open Economy

Ratings: (0)|Views: 9 |Likes:

More info:

Published by: Appan Kandala Vasudevachary on Mar 21, 2014
Copyright:Attribution Non-commercial


Read on Scribd mobile: iPhone, iPad and Android.
download as PPTX, PDF, TXT or read online from Scribd
See more
See less





 LM Model in Open Economy
It is time to relax the closed economy assumption and understand the impact & design of Macro economic policy in an open economy.
We first introduce the foreign balance constraint into IS-LM framework and then consider the design of optimal policies under fixed and flexible exchange rates.
Foreign Balance & IS-LM analysis:
With an open economy, the notion of Macro economic equilibrium has to be reinterpreted.
In the IS-LM frame work, full macro economic equilibrium is established when there is simulateneous equilibrium in the BOP accounts and the Goods & Money Markets.
We write the Goods Market equilibrium as ( IS Equation): I (r)+G+X = S (y) + T + Z
Where I = investment, G= exogeneous Govt Expenditure, X= exports, S=Savings, T=Taxes and Z= Imports.
As par as I,G,S,T we has a detailed discussion but regarding X & Z we should know:
Exports depend on the real exchange rate = ep*/p i.e., X = f (ep*/p)
P= domestic price level and p*= foreign price level.
Imports are a function of real income and the real exchange rate, so that
Z = f (Y, ep*/p)
BOP Equilinrium itself occurs when the net surplus on the current and capital accounts sum to zero. i.e., X-Z+K =O, K = Net inflow of capital.

You're Reading a Free Preview

/*********** DO NOT ALTER ANYTHING BELOW THIS LINE ! ************/ var s_code=s.t();if(s_code)document.write(s_code)//-->