Module Exchange Rates and Macroeconomic Policy KRUGMAN'S MACROECONOMICS for AP* 44 Margaret Ray and David Anderson.

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Presentation transcript:

Module Exchange Rates and Macroeconomic Policy KRUGMAN'S MACROECONOMICS for AP* 44 Margaret Ray and David Anderson

What you will learn in this Module : The meaning and purpose of devaluation and revaluation of a currency under a fixed exchange rate regime Why open-economy considerations affect macroeconomic policy under floating exchange rates

Devaluation and Revaluation of Fixed Exchange Rates Devaluation and Revaluation of Fixed Exchange Rates Why would Highlanders want to revise its fixed exchange rate?

Devaluation and Revaluation of Fixed Exchange Rates Devaluation and Revaluation of Fixed Exchange Rates Devaluing (depreciate) the Lander. Maybe Highlander has a recessionary gap. 1.Takes fewer US dollars to buy 1 Lander. 2.Goods now less expensive for American consumers. 3.US goods more expensive for Highlanders. 4.Reduces imports from US. 5.Highlander would experience an increase in net exports from US. 6.AD would shift right. 7.GDP grows.

Devaluation and Revaluation of Fixed Exchange Rates Devaluation and Revaluation of Fixed Exchange Rates Revaluing (appreciate) the Lander. Maybe Highlander has a inflationary gap. 1.Takes more US dollars to buy 1 Lander. 2.Goods now more expensive for American consumers. 3.US goods less expensive for Highlanders. 4.Increases imports from US. 5.Highlander would experience an decrease in net exports from US. 6.AD would shift left. 7.Reduces inflation.

Monetary Policy Under a Floating Exchange Rate Regime Monetary Policy Under a Floating Exchange Rate Regime Ability to pursue independent monetary policy Monetary policy results in changes in exchange rates and leads to other macroeconomic effects Changes in interest rates have a direct effect in the exchange rates and influence net exports

International Business Cycle International Business Cycle Shocks from abroad Synchronized business cycles Exchange rate regime influences synchronization of business cycles Floating exchange rates should lessen the impact of foreign shocks