Chapter 4. Flexible Prices: The Monetary Model

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Presentation transcript:

Chapter 4. Flexible Prices: The Monetary Model The Simple Monetary Model of a Floating Exchange Rate The Simple Monetary Model of a Fixed Exchange Rate Interest Rates in the Monetary Model

Monetary Model of a Floating Exchange rate Setting: AD is vertical Md = kPy = Ms = kPy = kY PPP obtains at all times and SP* = P

Initial Equilibrium MS0 = Md = kPy = kSP*y and

AD With Quantity Function

Money Supply Increase Under Floating Rates

An Income Increase Under Floating Exchange Rates

A foreign Price Increase Under Floating Exchange Rates

The Two-Country Model of A Floating Exchange Rate Md* = k*P*y* And if P/P*= S, then;

The Simple Monetary Model of a Fixed Exchange Rate FX + DC = MS FX = foreign currency reserves and S is fixed. MS0 = FX1 + DC1

A Money Supply Increase Under Fixed Rates

Devaluation Under Fixed Exchange Rates

Interest Rates in the Monetary Model

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