ISLMBP Applications to EMU Economics. ISLMBP Applications to EMU Economics 1) Fixed Exchange Rates, Fiscal Policy, Low Capital Mobility 2) Fixed Exchange.

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Presentation transcript:

ISLMBP Applications to EMU Economics

ISLMBP Applications to EMU Economics 1) Fixed Exchange Rates, Fiscal Policy, Low Capital Mobility 2) Fixed Exchange Rates, Fiscal Policy, High Capital Mobility 3) Fixed Exchange Rates, Monetary Policy, Low Capital Mobility 4) Fixed Exchange Rates, Monetary Policy, High Capital Mobility 1) Fixed Exchange Rates, Fiscal Policy, Low Capital Mobility 2) Fixed Exchange Rates, Fiscal Policy, High Capital Mobility 3) Fixed Exchange Rates, Monetary Policy, Low Capital Mobility 4) Fixed Exchange Rates, Monetary Policy, High Capital Mobility

ISLMBP Applications to EMU Economics 5) Flexible Exchange Rates, Fiscal Policy, Low Capital Mobility 6) Flexible Exchange Rates, Fiscal Policy, High Capital Mobility 7) Flexible Exchange Rates, Monetary Policy, High Capital Mobility 5) Flexible Exchange Rates, Fiscal Policy, Low Capital Mobility 6) Flexible Exchange Rates, Fiscal Policy, High Capital Mobility 7) Flexible Exchange Rates, Monetary Policy, High Capital Mobility

O Y BP LM 1 IS 1 r1r1 Y1Y1 a 1. Fixed exchange rates, Fiscal Policy, Low Capital Mobility

O r Y BP LM 1 IS 1 r1r1 Y1Y1 An expansionary fiscal policy: IS 2 a 1. Fixed exchange rates, Fiscal Policy, Low Capital Mobility

a O r Y BP LM 1 IS 1 r1r1 Y1Y1 An expansionary fiscal policy: BP curve steeper than LM curve IS 2 r2r2 b Y2Y2 1. Fixed exchange rates, Fiscal Policy, Low Capital Mobility

O r Y BP LM 1 IS 1 r1r1 Y1Y1 An expansionary fiscal policy: BP curve steeper than LM curve IS 2 a r2r2 b Y2Y2 1. Fixed exchange rates, Fiscal Policy, Low Capital Mobility

O r Y BP LM 1 IS 1 r1r1 Y1Y1 An expansionary fiscal policy: IS 2 a r2r2 b Y2Y2 Restoration of full equilibrium LM 2 r3r3 Y3Y3 c 1. Fixed exchange rates, Fiscal Policy, Low Capital Mobility

2. Fixed exchange rates, Fiscal Policy, High Capital Mobility O Y BP LM IS r1r1 Y1Y1 a

O Y BP LM 1 IS 1 r1r1 Y1Y1 An expansionary fiscal policy IS 2 a r2r2 Y2Y2 b 2. Fixed exchange rates, Fiscal Policy, High Capital M obility

O r Y BP LM 1 IS 1 a r1r1 Y1Y1 IS 2 r2r2 b Y2Y2 2. Fixed exchange rates, Fiscal Policy, High Capital Mobility

O r Y BP LM 1 IS 1 a r1r1 Y1Y1 IS 2 r2r2 b Y2Y2 Restoration of full equilibrium LM 2 r3r3 Y3Y3 c 2. Fixed exchange rates, Fiscal Policy, High Capital Mobility

O r Y BP LM 1 IS a r1r1 Y1Y1 An expansionary monetary policy 3. Fixed exchange rates, Monetary Policy, High Capital Mobility

O r Y BP LM 1 IS a r1r1 Y1Y1 An expansionary monetary policy LM 2 Y2Y2 r2r2 b 3. Fixed exchange rates, Monetary Policy, High Capital Mobility

O r Y BP LM 1 IS a r1r1 Y1Y1 An expansionary monetary policy Y2Y2 LM 2 r2r2 b 3. Fixed exchange rates, Monetary Policy, High Capital Mobility

O r Y BP LM 1 IS a r1r1 Y1Y1 An expansionary monetary policy Y2Y2 LM 2 r2r2 b Full equilibrium is restored back at point a ISLMBP analysis: fixed exchange rates

Analysis under free-floating rates –effects of exchange rate changes on the BP curve Analysis under free-floating rates –effects of exchange rate changes on the BP curve THE OPEN ECONOMY AND ISLM ANALYSIS

O r Y BP SURPLUS Movements in the BP curve Appreciation

O r Y BP DEFICIT Depreciation Movements in the BP curve

O r Y BP LM IS 1 Y1Y1 An expansionary fiscal policy IS 2 Y2Y2 r1r1 r2r2 b a ISLMBP analysis: floating exchange rates

O r Y BP LM IS 1 Y1Y1 An expansionary fiscal policy IS 2 a Y2Y2 r1r1 r2r2 b ISLMBP analysis: floating exchange rates

O r Y BP LM IS 1 Y1Y1 An expansionary fiscal policy IS 2 a Y2Y2 r1r1 r2r2 b ISLMBP analysis: floating exchange rates

O r Y BP 1 LM IS 1 Y1Y1 An expansionary fiscal policy IS 2 a Y2Y2 r1r1 r2r2 b Full equilibrium is restored at point c BP 2 IS 3 Y3Y3 r3r3 c ISLMBP analysis: floating exchange rates

O r Y LM BP 1 IS 1 Y1Y1 An expansionary fiscal policy: BP curve steeper than LM curve a r1r1 IS 2 Y2Y2 r2r2 b ISLMBP analysis: floating exchange rates

O r Y LM BP 1 IS 1 Y1Y1 An expansionary fiscal policy: BP curve steeper than LM curve a Y2Y2 r1r1 r2r2 b IS 2 ISLMBP analysis: floating exchange rates

O r Y LM BP 1 IS 1 Y1Y1 An expansionary fiscal policy: BP curve steeper than LM curve a Y2Y2 r1r1 r2r2 b IS 2 ISLMBP analysis: floating exchange rates

O r Y LM BP 1 IS 1 Y1Y1 An expansionary fiscal policy: BP curve steeper than LM curve IS 3 a Y2Y2 r1r1 r2r2 b BP 2 IS 2 Y3Y3 r3r3 c Full equilibrium is achieved at point c ISLMBP analysis: floating exchange rates

O r Y LM 1 IS 1 Y1Y1 An expansionary monetary policy a Y2Y2 r1r1 r2r2 BP 1 LM 2 b ISLMBP analysis: floating exchange rates

O r Y LM 1 IS 1 Y1Y1 An expansionary monetary policy a Y2Y2 r1r1 r2r2 b The balance of payments deficit causes the BP line to shift downward BP 1 LM 2 ISLMBP analysis: floating exchange rates

O r Y LM 1 IS 1 Y1Y1 An expansionary monetary policy a Y2Y2 r1r1 r2r2 b The depreciation causes the IS curve to shift to the right BP 1 LM 2 ISLMBP analysis: floating exchange rates

O r Y BP 2 LM 1 IS 1 Y1Y1 An expansionary monetary policy a Y2Y2 r1r1 r2r2 b Full equilibrium is restored at point c BP 1 IS 2 Y3Y3 r3r3 LM 2 c ISLMBP analysis: floating exchange rates