The Income Adjustment Mechanism and Synthesis of Automatic Adjustments Lecture 6 The Income Adjustment Mechanism and Synthesis of Automatic Adjustments

Chapter 17 The Income Adjustment Mechanism and Synthesis of Automatic Adjustments 17.1 Introduction 17.2 Income Determination in a Closed Economy 17.3 Income Determination in a Small Open Economy 17.4 Foreign Repercussions 17.5 Absorption Approach 17.6 Monetary Adjustments and Synthesis of the Automatic Adjustments

17.1 Introduction To examine how automatic income changes lead to BOP adjustment Assumptions -All prices remain constant -Under fixed exchange rate system -Nations operate at less than full employment -Marshall-Lerner condition is satisfied -Deficit or surplus arises in the current account

17.2 Income Determination in a Closed Economy Equilibrium National Income Multiplier in Closed Economy

FIGURE 17-1 National Income Equilibrium in a Closed Economy.

17.3 Income Determination in a Small Open Economy Equilibrium National Income Foreign Trade Multiplier

FIGURE 17-2 The Import Function

FIGURE 17-3 National Income Determination in a Small Open Economy.

17.4 Foreign Repercussions If the nation is large Foreign repercussions make foreign trade multiplier smaller and business cycles propagate internationally

17.5 Absorption Approach Domestic absorption A=C+I Y=C+I+(X-M) Y-A=B

17.6 Monetary Adjustments and Synthesis of the Automatic Adjustments 17.6a Monetray Adjustment 17.6b Synthesis of Automatic Adjustment 17.6.c Disadvantages of Automatic Adjustments