International Economics How Does the Open Macro-economy Work? 23/11/61 Session 22 How Does the Open Macro-economy Work? Aj. Noom (anuphak@gmail.com) Tel.0835426434

National Macro-economic Performance Goals Internal Balance Full employment, or an acceptably low unemployment rate Price stability, or an acceptably low inflation rate External balance Sustainable composition of the country’s balance of payments with the rest of the world

A Basic Framework for Macro-economic Analysis Domestic production depends on aggregate demand. GDP = C + I + G + (X – M) Aggregate Expenditure = C + I + G + (X – M) Aggregate Demand = C + I + G + (X – M) Inflation =

Trade depends on income.

A More Complete Framework : Three Markets Mundell – Fleming Model The Domestic Product Market The Money Market The Foreign Exchange Market (Balance of Payment)

The Investment – Saving Curve (Product Market) IS2 up Some exogenous shocks that shift the IS curve up (or to the right) An increase in government spending or a tax cut (Fiscal Policy) An improved customer expectations about the future The shift in the tastes of foreign customers toward the country’s products.

The Liquidity – Money Curve (Money Market) LM2 Down Some exogenous shocks that shift the LM curve down (or to the right) An increase in the money supply (Monetary Policy) A decrease in average price level ( i.e., due to a sudden decline in oil prices) The introduction of credit cards.

The Foreign Exchange Market (or Balance of Payment) FE2 Down Inflow > Outflow (Export > Import) Some exogenous shocks that shift the FE curve down (or to the right) An increase in exports A decrease in foreign interest rate

Macro-economic Policies