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    Lecture Notes 3

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    windows3123
    This document provides an overview of Chapter 19 from an economics textbook. The chapter builds a model to explain the relationships between key variables in an open economy, such as the trade balance, exchange rate, interest rate, national saving, investment, and capital flows. It demonstrates how the market for loanable funds and the market for foreign currency exchange are interconnected. Government policies that impact variables like the budget deficit, saving, or investment will reverberate through these markets and influence the trade balance and exchange rate. The chapter aims to establish this theoretical framework for analyzing macroeconomic effects in an open economy.

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    Lecture Notes 3

    Uploaded by

    windows3123
    14 views1 page
    This document provides an overview of Chapter 19 from an economics textbook. The chapter builds a model to explain the relationships between key variables in an open economy, such as the trade balance, exchange rate, interest rate, national saving, investment, and capital flows. It demonstrates how the market for loanable funds and the market for foreign currency exchange are interconnected. Government policies that impact variables like the budget deficit, saving, or investment will reverberate through these markets and influence the trade balance and exchange rate. The chapter aims to establish this theoretical framework for analyzing macroeconomic effects in an open economy.

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    This document provides an overview of Chapter 19 from an economics textbook. The chapter builds a model to explain the relationships between key variables in an open economy, such as the trade balance, exchange rate, interest rate, national saving, investment, and capital flows. It demonstrates how the market for loanable funds and the market for foreign currency exchange are interconnected. Government policies that impact variables like the budget deficit, saving, or investment will reverberate through these markets and influence the trade balance and exchange rate. The chapter aims to establish this theoretical framework for analyzing macroeconomic effects in an open economy.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    14 views1 page

    Lecture Notes 3

    Uploaded by

    windows3123
    This document provides an overview of Chapter 19 from an economics textbook. The chapter builds a model to explain the relationships between key variables in an open economy, such as the trade balance, exchange rate, interest rate, national saving, investment, and capital flows. It demonstrates how the market for loanable funds and the market for foreign currency exchange are interconnected. Government policies that impact variables like the budget deficit, saving, or investment will reverberate through these markets and influence the trade balance and exchange rate. The chapter aims to establish this theoretical framework for analyzing macroeconomic effects in an open economy.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 1

    A MACROECONOMIC

    19 THEORY OF THE OPEN


    ECONOMY

    LEARNING OBJECTIVES:

    By the end of this chapter, students should understand:

    ¾ how to build a model to explain an open economy’s trade balance and exchange rate.

    ¾ how to use the model to analyze the effects of government budget deficits.

    ¾ how to use the model to analyze the macroeconomic effects of trade policies.

    ¾ how to use the model to analyze political instability and capital flight.

    CONTEXT AND PURPOSE:

    Chapter 19 is the second chapter in a two-chapter sequence on open-economy macroeconomics.


    Chapter 18 explained the basic concepts and vocabulary associated with an open economy.
    Chapter 19 ties these concepts together into a theory of the open economy.
    The purpose of Chapter 19 is to establish the interdependence of a number of economic
    variables in an open economy. In particular, Chapter 19 demonstrates the relationships between
    the prices and quantities in the market for loanable funds and the prices and quantities in the
    market for foreign-currency exchange. Using these markets, we can analyze the impact of a
    variety of government policies on an economy’s exchange rate and trade balance.

    KEY POINTS:

    1. To analyze the macroeconomics of open economies, two markets are central—the market for
    loanable funds and the market for foreign-currency exchange. In the market for loanable
    funds, the interest rate adjusts to balance the supply of loanable funds (from national saving)
    and the demand for loanable funds (from domestic investment and net capital outflow). In
    the market for foreign-currency exchange, the real exchange rate adjusts to balance the
    supply of dollars (for net capital outflow) and the demand for dollars (for net exports).
    Because net capital outflow is part of the demand for loanable funds and provides the supply
    of dollars for foreign-currency exchange, it is the variable that connects these two markets.

    2. A policy that reduces national saving, such as a government budget deficit, reduces the
    supply of loanable funds and drives up the interest rate. The higher interest rate reduces net

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