1. The Income Adjustment Mechanism and Synthesis of Automatic Adjustments
Lecture 6
The Income Adjustment Mechanism and Synthesis of Automatic Adjustments

2. Chapter 17 The Income Adjustment Mechanism and Synthesis of Automatic Adjustments
17.1 Introduction
17.2 Income Determination in a Closed Economy
17.3 Income Determination in a Small Open Economy
17.4 Foreign Repercussions
17.5 Absorption Approach
17.6 Monetary Adjustments and Synthesis of the Automatic Adjustments

3. 17.1 Introduction
To examine how automatic income changes lead to BOP adjustment
Assumptions
-All prices remain constant
-Under fixed exchange rate system
-Nations operate at less than full employment
-Marshall-Lerner condition is satisfied
-Deficit or surplus arises in the current account

4. 17.2 Income Determination in a Closed Economy
Equilibrium National Income
Multiplier in Closed Economy

5. FIGURE 17-1 National Income Equilibrium in a Closed Economy.

6. 17.3 Income Determination in a Small Open Economy
Equilibrium National Income
Foreign Trade Multiplier

7. FIGURE 17-2 The Import Function

8. FIGURE 17-3 National Income Determination in a Small Open Economy.

9. 17.4 Foreign Repercussions
If the nation is large
Foreign repercussions make foreign trade multiplier smaller and business cycles propagate internationally

10. 17.5 Absorption Approach
Domestic absorption
A=C+I
Y=C+I+(X-M)
Y-A=B

11. 17.6 Monetary Adjustments and Synthesis of the Automatic Adjustments
17.6a Monetray Adjustment
17.6b Synthesis of Automatic Adjustment
17.6.c Disadvantages of Automatic Adjustments