Professional Documents
Culture Documents
in an Open Economy
The IS Relation - Open Economy
The Demand for Domestic Goods
In an open economy, the demand for
Z C I G I M / X
The Demand for Domestic Goods
The Determinants of C, I, and G
C I G C (Y T ) I (Y ,r ) G
( ) ( , )
Y C I G IM / X
Increases in Domestic Demand
An increase in
government spending
leads to an increase in
output and to a trade
deficit.
The Effects of a
Depreciation
A depreciation works by
making foreign goods
relatively more expensive.
Combining Exchange-Rate and
Fiscal Policies
Reducing the Trade
Deficit Without
Changing Output
To reduce the trade deficit
without changing output,
the government must both
achieve a depreciation
and decrease government
spending.
N X S (T G ) I
Saving in the U.S.
Saving, Investment, and the Trade Balance
N X S (T G ) I
A trade surplus must correspond to an
excess of saving over investment, and vice
versa.
If saving remains constant, an increase in
investment results in a deterioration of the
trade balance.
An increase in the budget deficit leads to a
deterioration of the trade balance.