BOP in IS-LM Model Internal Balance: The attainment of the level of real income consistent with the economy’s long run growth path.

BOP in IS-LM Model External Balance: The attainment of some objective for private international goods, services, income, and assets.

BOP in IS-LM Model External Balance means different things for different policymakers.

BOP in IS-LM Model External Balance means different things for different policymakers. It could mean: achieving trade surplus, or

BOP in IS-LM Model External Balance means different things for different policymakers. It could mean: achieving trade surplus, or achieving surplus in their current account (international trade and transfer of goods and services and flows of income), or

BOP in IS-LM Model External Balance means different things for different policymakers. It could mean: achieving trade surplus, or achieving surplus in their current account (international trade and transfer of goods and services and flows of income), or achieving balance in one or both

BOP in IS-LM Model External Balance means different things for different policymakers. It could mean: achieving trade surplus, or achieving surplus in their current account (international trade and transfer of goods and services and flows of income), or achieving balance in one or both achieving balance in private transactions such as zero balance after current and capital accounts are added to prevent government obligations.

BP Schedule A set of real income-nominal interest rate combinations that maintain a zero balance for private payments - sometimes called a “balance of payments equilibrium” in the balance of payments accounts.

BP Schedule Any point (A or B) on the BP schedule entails external balance: zero private payment. Interest rate Real income A B y1y1 y2y2 BP r1r1 r2r2

BP Schedule Starting from point A, if income rises to y 2, imports rises to higher level and a Deficit will develop (C). This requires a higher interest rate to attract foreign funds to cancel the trade deficit (B) Real income A C B y1y1 y2y2 BP

BP Schedule Interest rate Real income A C B y1y1 y2y2 BP

BP Schedule Assume the following dilemma: full employment income is at Y* equilibrium level of income is Y 2 equilibrium level of income that satisfies equilibrium in the BP is Y 1. What should the central bank do?

BP Schedule Interest rate Real income y1y1 y2y2 BP IS LM Y*Y*

Expansionary Monetary Policy would lead to full employment but larger trade deficits Interest rate Real income y1y1 y2y2 BP IS LM Y*Y* LM ’

Contractionary Monetary Policy would exacerbate employment but solves trade deficit problem Interest rate Real income y1y1 y2y2 BP IS LM Y*Y* LM ’