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1、MACROECONOMIC POLICY IN AN OPEN ECONOMY CHAPTER 7 Economic Objectives of NationsoObjectives of macroeconomic policynInternal balance nExternal balancenLong-term economic growthnReasonably equitable distribution of national income2Economic Objectives of NationsoInternal balancenEconomic stability at
2、full employmentA fully employed economyNo inflationoExternal balancenWhen it realizes neither deficits nor surpluses in its current accountoOverall balancenInternal balance and external balance3Policy InstrumentsoExpenditure-changing policiesnAlter the level of total spending (aggregate demand) for
3、goods and servicesProduced domestically and importednFiscal policyChanges in government spending and taxesnMonetary policyChanges in the money supply and interest ratesCentral bank4Policy InstrumentsoExpenditure-switching policiesnModify the direction of demandShifting it between domestic output and
4、 importsnUnder fixed exchange rates and trade deficitDevalue its currencynUnder managed floating exchange-rate and to increase its competitiveness Depreciate its currency5Policy InstrumentsoDirect controls nGovernment restrictions on the market economynTo control particular items in the current acco
5、untnTo restrain capital outflowsnTo stimulate capital inflows6Aggregate Demand and Aggregate SupplyoAggregate demand-aggregate supply modelnAggregate demand curve (AD)Level of real output (real GDP) purchased at alternative price levels during a given yearSpending by domestic consumers, by businesse
6、s, by government, and by foreign buyers (net exports)As the price level fallsThe quantity of real output demanded increases7Aggregate Demand and Aggregate SupplyoAggregate demand-aggregate supply modelnAggregate supply curve (AS)Relation between the level of prices and amount of real output that wil
7、l be produced by the economy during a given yearUpward sloping Per-unit production costs and prices increase as real output increasesnEquilibrium: AD = AS8Aggregate Demand and Aggregate SupplyoShifts in aggregate demand curvenChanges in the determinants of ADConsumption, investment, government purch
8、ases, or net exportsoShifts in the aggregate supply curve nChanges in the price of resources, technology, business expectations9The economy is in equilibrium where the aggregate demand curve intersects the aggregate supply curve. This intersection determines the equilibrium price level and output fo
9、r the economy. Increases (decreases) in aggregate demand or aggregate supply result in rightward (leftward) shifts in these curves.10Macroeconomic equilibrium: the aggregate demand-aggregate supply modelFIGURE 7.1Monetary and Fiscal Policy in a Closed EconomyoIf aggregate output is too low and unemp
10、loyment is too highnGovernment - increase aggregate demand for real outputExpansionary monetary or fiscal policiesIncrease in the countrys real GDP11Monetary and Fiscal Policy in a Closed EconomyoIf inflation is troublesomenGovernment - reduce the level of aggregate demand for real outputContraction
11、ary monetary or fiscal policyUpward pressure on prices is softened and inflation moderatesoExpansionary monetary or fiscal policynIncrease in aggregate demand Increase in domestic consumption, investment, or government spending12(a) Expansionary monetary or fiscal policy in a closed economy.13Effect
12、 of an expansionary monetary or fiscal policy on equilibrium real GDP (a)FIGURE 7.2Monetary and Fiscal Policy in an Open EconomyoExpansionary monetary or fiscal policynInitial effect: Increase in aggregate demand Increase in domestic consumption, investment, or government spendingnSecondary effect:
13、Increase or decrease in aggregate demandChanging net exports and other determinants of aggregate demand14Monetary and Fiscal Policy in an Open EconomyoIf the initial and secondary effects - increases in aggregate demandnStrengthened effect of expansionary policyoIf the initial and secondary effects
14、- conflicting impactsnWeakened effect15Monetary and Fiscal Policy in an Open EconomyoExpansionary fiscal policy; fixed exchange ratesnInitial effect: Increase aggregate demandnSecondary effect: Increase aggregate demandBudget deficit; Higher interest rateIncreased demand for domestic currency in for
15、eign-currency marketPurchase foreign currency with domestic currencyIncrease in the domestic money supplyIncrease the amount of loanable fundsnFiscal policy - strengthened under fixed exchange rates16Monetary and Fiscal Policy in an Open EconomyoExpansionary monetary policy; fixed exchange ratesnIni
16、tial effect: Increase aggregate demandReduce the domestic interest rateIncreased consumption and investmentnSecondary effect: Reduce aggregate demandDecreasing demand for currencyPurchase domestic currency with foreign currencyDecrease in money supply and loanable fundsnMonetary policy - weakened un
17、der fixed exchange rates17Monetary and Fiscal Policy in an Open EconomyoExpansionary monetary policy; floating exchange ratesnInitial effect: Increase aggregate demandReduce the domestic interest rateIncreased consumption and investmentnSecondary effect: Increase aggregate demandDomestic currency de
18、preciatesIncrease in exports, decrease in imports, improvement in current accountnMonetary policy strengthened under floating exchange rates18Monetary and Fiscal Policy in an Open EconomyoExpansionary fiscal policy; floating exchange ratesnInitial effect: Increase aggregate demandnSecondary effect:
19、Decrease aggregate demandBudget deficit; Higher interest rateIncreased demand for domestic currency in the foreign-exchange marketDomestic currency appreciates; Falling exportsRising imports, Deteriorating current accountnFiscal policy weakened, floating exchange rates19(b) Expansionary monetary pol
20、icy or fiscal policy in an open economy. (1) The policys initial and secondary effects reinforce each other. (2) The policys initial and secondary effects conflict with each other.20Effect of an expansionary monetary or fiscal policy on equilibrium real GDP (b)FIGURE 7.321The effectiveness of moneta
21、ry and fiscal policy in promoting internal balance for an economy with a high degree of capital mobilityTABLE 7.1Exchange-Rate RegimeMonetary PolicyFiscal PolicyFloating exchange ratesStrengthened Weakened Fixed exchange ratesWeakened Strengthened Macroeconomic Stability and the Current Account: Pol
22、icy Agreement vs. Policy ConflictoRecession + current account deficitnFloating exchange ratesnExpansionary monetary policy to combat recessionCurrency depreciationRise in exports and fall in importsnReduce the current account deficitoA single economic policy promotes overall balance22Macroeconomic S
23、tability and the Current Account: Policy Agreement vs. Policy ConflictoInflation + current account deficitnContractionary monetary policy to combat inflationIncrease in domestic interest rateCurrency appreciationFall in exports and rise in importsnLarger current-account deficitoPolicy conflict: mone
24、tary policy (or fiscal policy) alone will not restore both internal and external balance23Inflation With UnemploymentoInflation with unemploymentnInternal balance cannot be achieved just by manipulating aggregate demandReduce AD to decrease inflationIncrease AD to decrease unemploymentoOverall balan
25、ce - three separate targetsnCurrent-account equilibriumnFull employmentnPrice stability24International Economic-Policy CoordinationoEconomic relations among nationsnConflictnIndependence nIntegration oPolicy cooperationnOfficials from different nations meet to evaluate world economic conditionsoPoli
26、cy coordinationnFormal agreement among nations to initiate particular policies25Relations among national governments can be visualized along a spectrum ranging from policy conflict to policy interdependence. Between these extremes are a variety of forms of cooperation and coordination.26Relations am
27、ong national governmentsFIGURE 7.4G-20 agrees to cooperate on global economic policy: international policy coordinationoWorld economy - out of balance with the U.S.nU.S. most of the global current-account deficitnChina, Japan, and Germany most of the global surplusoUnited StatesnConsumed more than i
28、t producednInvested more than it saved nBorrowed from trading partners27G-20 agrees to cooperate on global economic policy: international policy coordinationo2009, Group of 20 nations - The G-20 plan:nCoordinate macroeconomic policiesnFoster balanced economic growthnChina and Japan - rely less on ex
29、ports and more on domestic consumptionnThe U.S. - curtail its budget deficitnEurope - difficult structural reforms to increase business investment28G-20 agrees to cooperate on global economic policy: international policy coordinationoG-20nMembers will need periodically to review each nations policie
30、snAct by moral suasion, not sanctions29International Economic-Policy CoordinationoObstacles to successful policy coordinationnSome nations give higher priority to price stability, or to full employment, than othersnSome nations have a stronger legislatureOr weaker trade unions, than othersnThe party
31、 pendulums in different nationsShift with elections occurring in different yearsnOne nation may experience economic recession While another nation experiences rapid inflation30International Economic-Policy CoordinationoPlaza Agreement of 1985, G-5nThe United States, Japan, Germany, Great Britain, an
32、d FrancenOvervalued U.S. dollarnTwin U.S. deficits (trade and federal budget) were too large31International Economic-Policy CoordinationoPlaza Agreement of 1985, G-5nEach country Specific pledges on macroeconomic policyAgreed to initiate coordinated sales of the dollarnBy 1986, dollar had dramatical
33、ly depreciatedoLouvre Accord of 1987, G-5nNew concern: uncontrolled dollar plungenIntervention policies curbing the pace of the dollars depreciationnOther macroeconomic adjustments32International Economic-Policy Coordinationo2000, G-7nThe United States, Canada, Japan, the United Kingdom, Germany, Fr
34、ance, and ItalynCoordinated purchases of the euro to boost its valuenFrom $0.84 per euro to more than $0.88 per euronWithin two weeks following the intervention, the euros value slid to an all-time low33Monetary and fiscal policy respond to financial turmoil in the economyo2008-2009 recessionnFedera
35、l ReserveLowering the federal funds rate target to virtually zeroExpanded its role as lender of last resortCredit to banks and other financial institutions as well as businesses34Monetary and fiscal policy respond to financial turmoil in the economyo2008-2009 recessionnU.S. government Economic Stimu
36、lus Act of 2008$113 billion (0.8% of GDP) one-time tax rebates to lower- and middle-income individuals and householdsTo be spent immediatelyHoping to increase the aggregate demandOnly 10-20% of the tax rebate dollars were spentThe rest: household saving or for paying down past debt35Monetary and fis
37、cal policy respond to financial turmoil in the economyo2009, Barack ObamanFiscal stimulus program of $789 billion$507 billion in spending programs$282 billion in tax reliefDesigned to increase the aggregate demand36Does crowding occur in an open economy?oCrowding out nIncreased government expenditur
38、es and the subsequent budget deficitsnPrivate consumption or investment spending decreasingHigher interest rates caused by budget deficitsoGovernment deficitsnDont necessarily squeeze out private spending37Does crowding occur in an open economy?oRecessionsnPeople are not spending all of the available fundsConsumers are saving more than businesses intend to investnDeficit-financed government spending doesnt crowd out private spendingoExtent of crowding out nLessened in an open economy with capital flowsInflows of capital from abroad keep interest rates lower38
