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    © All Rights Reserved
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    6 views16 pages

    Shapiro Unit 1 Macro

    Uploaded by

    Amanda Ruth

    Copyright:

    © All Rights Reserved
    Download as PDF or read online from Scribd
    Flag for inappropriate content
    of 16
    235, Toory—which argues that onty Rca policy can De elective On the bacis of his analy, te LA function, tis assumed to vary rom periet ne The Extended OVERVIEW___ Model: Fixed tusnenernces: Price Level functors is the cenvati "e ageowe trun fe sae comets) mans ncten ‘eortcomreaning aot sx be Aoprda8 OMe, wettest fomed ae gover Seat ee ieee neh aa aia encit288! utin te next part ofthe chapter or changes ~ oie v ny nar ome ment spending and taxation. Here again coma “arty mine xp SLM hor, fe ngs great, soa Sauce se = ‘5UCh 28 10 pe Jee ae the assumptions are Pliers presented In Chapter 6 are found to apply aC seer soars ‘demand curve, *toctlyineiastic aggregate ‘only when the monetary authority acts to maintain ‘nee ren seen care 8 constant interest rat Serer nc en than it woud otherwise be, Therelore, appears. vole. ee ee rare ee | ‘TE EATENGED MODEL FRED PRICE LEVEL forthe cure—say me nstead of mg, Ths would indicate a diferent equitorim rate cf ntorest quitrmeanaiion: ¥ = CM + 1) SL wich tig + Ming Mey = My. QUE 12-2, Fommver de noltavealwhatthelevelotincame From the §. | approach, we have, in genera) Maar ve taseumes comeincomeleveland pro-_ tme. te lowed twee cents cova te ‘coeds fom there. pads markt: appears hat we cannot determine he equ rum income level without fist knowing the ee ram Equitrumconction: S17) = 1) - " “ sit LD —————— 2 Equilibrium means @ low | A low 1s the tesut ofa high ‘though the IS tunction incicales that equi. 900d market wi ion are equally pos- ‘Combinations of Yand i the ‘Combination of Y = $140 and r = G percent is «also disequilibrium trom a second point ol view ‘Atthe interest rate of 6 percent, Swillequal only ‘tthe come level is $120. Therelore, given the ‘combination ofthis 6 percentinterestrateand an By the same lin of reasoning th combina- ton of ¥ = $120 and r'= 5 percent indicated as 6 othe let of the IS curve, there is a cise- Ghia in wich I exceeds 8 ond (C +1 240 ‘ex0880 ¥ Inosher words. ne aggregate spend- $9 on goods excnds he appre ores areal ouput oa 6 Ye — ey GHAPTER TWD: © EEXTENOED MODEL FIED PRICE LEVEL a “% Y- Y Be i — — 2 _ CHAPTER TELE the money 2 DPM lor ranssctions balances. Ths four areas jough IV As we saw earier, any combrnaion ‘anywhere tothe right ofthe 1S 8 ‘ol and Gemand for goods c within that space: Money Goods Market Market because m, will be ‘above $100 than it willbe at $100. The (of money demanded for transactions rises FIGURE 12-6 Possible Paths of Movement to Y= $100 and r = 6 percent incicated as point Fea cisequllorum ofthe opposte kind: m, must here exceed m, Generalizing as betore, there is. FIGURE 12-5 Aioeum situ ae Goods Peiseguibrumtin which m, exceeds foray Equilibrium in the Goods and (Manion oer eat wt ‘combination of ¥ and r lated inthe space to ‘Money Markets "espanse oan excess supplyor excess demand —_—_—— the lot ol the LM curve. ee nn oe Terme aR RE Gann "WE EXTENDED MODEL FED PRICE LEVEL ba rome tecause we ae on he Scone Bute ares. Awas shown he mew Te a, {8 port fo the ng of fe LM cure, ao he etrsecten, he comin pa EET ing dhrandtermoney econ imorey any mx ow HOM EH pce nae " Die eueros nivonetnan te tang tw revere cei” eg ‘the arrow from 6 to C. ALC there is stil an excess ‘provides equilibrium in both markets shanged Gamand for money, which again tends to push evel and the interest rate will main Un! shit in “until the existing equilibaum i upset DY arrow onginating at C. However, at C there is an the [Sor LM cure, ori both. Ine waning torn Ato an then ae ere tno theo cures tat, oe as prety este u othe a \ntadf staring at A weed san stery enpoymentivlloupgbutpeecyineasic | .s cher aguttstan pont Fipue 126 and al Pal level Ts kd ol AS Cove thom fh \ 8 vi proace suena, trace the movement of ¥ and toward the single Part B ol Figure 12-/. The present model also — pai of equim value he same way No assumes a he econo operate bow the | FIGURE 12-7 {hatter what disequitorium pont one starts employment level of ouput | IS-LM Carves and Changes in Aggregate Brave reedsor (dmaywhener!> 5 < petachy Base potent te AStome are, | = carve aa S, or! = Sor in terms of agnregate spending | ‘Aggregate Deman sae ———— Deman whether (C+ > VC + N Mm, med Yard as whee doe, Wal Lanne ' ote a a imam, Om, = M, which tells wheter f wil tow etre us does rt alr Chaise, eriman vowrpet wos) Berenensactroumend ot conquers noscun ggeRe Ae Oe Mahe iocareea nore establish the direction of movernent of the ¥, ¢ Koran intial clseauiloium poston the Aor A bi ply ony determines level of Y identified by he new intersection. Shifts Cemnbnatton cesta by he ces foundto bee eum d maa age PEE hg 1A wil Sl seration ofthe AD curve the 1S hncton are caused by sits te ‘at work in (1) and (2) For example, starting with srcher can bo Jone cay mats "2 98 pared i inthis model, he Gorvetne spo classical svestment or the saving uncton (Pats A and C any point in'Space | such as E, forces lend to S-Nmoad ant name aco The ‘amare complicated than inte 3 nT cay oP sryforin oes oce si es rare cen sarcanant en epee EP 9 OD yay fate. The reader may Wace the cacree steps Neve b8eaulbrum. bt oer at poy ns oe money Here depends one Tijourwes, tone gerard. or speculative demand rons ftom through H, which ae diferent indirection fu ot wer nee lt Hl be acne determin he postions oliesefaciors._(PartsB,C. and A respecte, of Faure oo) but exacly symmetrical with those fom A trough vaues der an Pa eget Tess acs ner pate Finally ashi in any ofthe functions on wich he Se | The Extended rea, 0 OVERVIEW. Sector sat eee Included veal ioe? PAHS and exports have been ft info the IS-LM apparatus, that apparatus is els lcated i cated nother counties. Th statement expanded by adging tots IS and LM functions a omar i tit function forthe balance of payments—the Combination wih the imports and exports of rs a AE ETTENGED WODEL FOREIGN SECTOR INCLUDED 283 ides euloium nthe balance ol paymens, py cuve, equiva betwen sages dn soe and aggregate supply can occur at any lever is ‘To obtain this equiltrium requires certain rela- level of output requires an inccease in is found. ‘aggregate PP ta corn actors caUEe SS inthe IS deme ‘The process by which the two cbectves bination is not on the BP curve, there isan exter- On the other sie, of couse, isthe aggregate ‘Such a surplus or deficit, an agustment process factors onthe ho sides, itis possible to Face the takes place. Because the adjustment process effect of sucha change on the primary variables ‘under a system THEEXTENDED MODEL FOREIGN SECTOR INCLUDED ‘economy and the three-sector economy, respec: ‘ively, show all combinations ol and Y at which S= land S + T= 1+ G, the IS cure for he four-sector economy shows the combi rand atwhich $+ T+M=1+G S+T+M=14G 4 X,treleakages' ‘income stream are equal to the injection into it; the quantity of goods demanded remains ———nomea— Derivation of the IS Function ei reten _ _ —_ / thant ctherise wuld be; the 15, curve mute thele a FIGURE 14-2 Shifts in the IS Function ——_—_——— increase inincomes in ther courtnes, a decrease ‘Assuming no change in relative prce levels or other things, the new equibrium is given by the intersection of 1S; and LM, at which Y = Y, and 1 =f, This merely introduces another variation Of the basic analysis of Chapter 12. There we traced the same kind of change inte ¥, requ rium as result of a shit in the investment Ccuve, an increase in govermiant purchases, of 4 decrease in tax receipts. each of which shits the IS curve tothe right. ‘We may now examine the elects ota change Intelative price levels othe ratio ofthe domestic ‘21gn goods rlatve mere expeneie. Tis charge, taken by sell, would sot te IS curve ngpinars emia sSes Suggest at ass Pe uml rek Aipough 1s thereat wo wi acco hve. Leste (aly posse Pat te rlabe ree m Ba ce elo mest gonds cole an gree et pas ments 1s 19 equllbeum accumulation nora decumulaton| ‘account and H = $25 - $30 (capital outflow ‘meus captal inlaw) of a balencé’on capital acomutl ~$5,iien.WihX - M= ~$Spilion and H = ~$5 bon he sum of (X\— Mf) ~ H iste, and heres gain a balance of payments exuibrum, Ofcourse varus changes inthe istrative ‘bors wil comer the equiibum oa deficit a Sapbs. In general, stating tom a balance ‘ol paymens equim, any reductonin he net expo bance or increase in he net import bal ‘ce wl resin abalance ol payments dei. assuring ro change in he balance on capi acount. And any increase inte net export bal- see o decreas in the rat impor balance wil resin a balance of payments Supls on he same assumption Staring again oma balance ‘payments equim, ay crease in the net 2p cuthow oF decease in the net capil inflow wil resutin a balance o payments dati, {suming no change in the balance on cuen ‘account Andany decrease inte nel capa ou Derivation of the Balance of Payments Function ‘and H on the horizvual axis and therefore a 2610 value for In the same way that the 1S function was Connecting the points ident fed nese andohersucncombaaters yds payments ups at The same concn a te BR knction halanes of payments surplié—wil be found for 'BP function wal aways slope upward to any other combination of Y and tates above th nghi—that is, balance of payments equii® the AP curve. inPartD. Balance, wich wil 00, wih a eae ow change nthe Foreign Exchange Rate A chase ne US cumerey ut US impo wi AChong ise be pce Slore gota fe US coecy ut al ‘rt rae lerctet Fr example, nie chase mre ot each forogn curerey unt al of income, \ Ber point along the BP cure identities @ combination or and Yat which X — M= Hor 8 = 0.Evey combination nat onthe cur is one al which X — M2 H of B20, Specialy, a combinations above te BP line ae combing- tions at which X ~ M > H,incicatng a balance ‘of payments surpls; a combinatons below he BP ine are combination at which X ~'M'< H, indicating a balance ol payments deci, | sr meansthatbebuyeroldoters Consequerty balance of paymens equim eT 295 ratons custercy. the changes in #8 price lve reise 0 loregn prce evel, tect the poston ot bag he BP and IS ncions Balance of Payments Disequilibrium and the Money Supply. jr lithe balance of payments i in equitbrum, the payments 10 foreigne’s fr goods and ser imported and for real and financial assets acquited abroad are exacty equa to the ttl receips from foreigness for Meir imports of ‘g00ds and services ftom the dorestic economy and for thei teal and financial assets acquired in the domeste economy. However, a Supls means that receipts ftom abroad exceed pay- ments made abroad, and a deficit means that payments made abroad exceed receipts rom abroad. Such an imbalance between cupay- ments and ingayments may cause changes in the economy/s money supply, andchanges inthe ‘money supply play alin tre process by which ‘a naton achieves extemal and intemal equit- rium, We wil examine ths process inthe next ion; nere we wil lok atthe way that pay- iments imbalances may cause changes i @ country’s money supp. Exporters and others who receive foreign carencies (general in the form o bank dts | or claims to foreign currency raer than achat “hs explained in foot 3, tis neoeticaly posse fora ein a county's pice eve! lave to feign pce levels to resut nan ncrease inthe money vale fet expos ora decreaseinthe mana vate ct netimpos, of sna expors a crease i morey vee otis ‘el impo, ithe pice easiciies of demand are a5 money) selthese curerces io conmerial barks in exchange for ther own curency. Importers ‘and others who make payment in oegn curer ‘ies bythe needed foreign curecis om he banks wth ther own curency a county has @ balance of payments surplus for any given time ppetiod, the commercial banks as a group wil trperence an increase in the oval holdings ‘of foreign curencies ove: that period. The ariount fof foreign currencies purchased each day ‘added to the banks’ assets; the payments ft these currencies (typical inthe farm of credits to the demand depost balances othe soles) At ek one bans ies. Sia, the amos sold each day a —_ miccteremraendrac es mi tmamaontan a Sats mer eran Smo ore ere Signatjocssomoetet akc emational monelary system ol ne resem may be feanced resneccurge acs ny banca rs ab a The central lsholdings of US. doliars or gold for tanes pe- importers aoe oe? °° Cuteness ty re whos erenert ay currencies or gold to meet he demands oftnose who wished to convert the domestic curency ino foreign currencies. AS ong as the central ‘bank had the resowves fo mest such demands and was wilin 10 use them, the extemal value ha natin's currency could be maintained ‘though it bypasses many complications, ‘our reviw i suticint io show he way in wich ‘balance of payments dei or surplus tends decrease a deficit country’s marey supply and increase a surplus country's mney suppl Ur Ger an ternational monetary system of fixed erchange rates. However. n 1973, the Bretton in tavor ola sys oF a surplus to cause the money supply as it did under th old system ol xed exchange rates, Using the groundwork laid in the preceding ‘pages, we wil now examine the processes By ‘which a surpius of deft inthe balance of pay- nents ray be eliminated. In PartA of Figue Ye, internal equit kam is defined bythe Y,f ‘combination at which th IS and LM curves iter. ‘sect However, because the intersection ies ‘hares and ed wl ose Fares er commer Dore br comestceatancy Te US, comercial barks ator wen US. expr who accepted Manes 987 (tort ond ne oer ston wi French ines rohove agreed o maka ponent CHAPTER FOURTEEN lige __ FIGURE 14-5 alance of Payments Disequilibria Oe eee ‘of payments defi section mus be nether above nor below the BP wiltrace the basic mechanics o process under each of the two systems: ‘The Flexible Exchange Rate — FIGURE 14-6 | _Balance of Payments Equilibrium under Flexible Exchang? Rates FIGURE 14-7 Balance of Payments Equilibrium under Fixed Exchange Rates inthe LM curve and a rightward shit in both the the ful employment evel ang rere a Keynes- 1S ard 8? curves, Equiorum cccus at Y, r, anlesstharil amployrent equibeum, How. where S, LM, and BP, wtersect ve onthe assicl assumption of Gowrwary fevtle wages and prces tne AS cuve se" tal ire afte hal employmere level of ouput f Balance of Payments Silat doapabane nt na engi

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