1. PowerPoint Presentation by Charlie Cook Copyright © 2004 South-Western. All rights reserved. Chapter 9 Exchange Rates and the Balance of Payments

2. Copyright © 2004 South-Western. All rights reserved.9–2 Fundamental Issues 1.How is the private payments balance determined in the IS-LM model? 2.How do government budget policies affect the private payments balance in the traditional Keynesian theory? 3.How do monetary and fiscal policy actions affect a nation’s real income under fixed exchange rates? 4.How do monetary and fiscal policy actions affect a nation’s real income under floating exchange rates?

3. Copyright © 2004 South-Western. All rights reserved.9–3 Figure 9–1 The BP Schedule

4. Copyright © 2004 South-Western. All rights reserved.9–4 Figure 9–2 IS-LM Equilibrium and the BP Schedule

5. Copyright © 2004 South-Western. All rights reserved.9–5 Figure 9–3 Policy Actions to Eliminate Private Payments Deficits

6. Copyright © 2004 South-Western. All rights reserved.9–6 Figure 9–4 The Effects of a Domestic Currency Depreciation on the IS and BP Schedules

7. Copyright © 2004 South-Western. All rights reserved.9–7 Figure 9–5 Fiscal Policy and Exchange-Rate Adjustments That Would Eliminate Budget and Private Payments Deficits

8. Copyright © 2004 South-Western. All rights reserved.9–8 Source: Economic Report of the President, 2002; Economic Indicators. Figure 9–6 The Value of the Dollar, the Federal Budget Deficit, and the Private Payments Deficit

9. Copyright © 2004 South-Western. All rights reserved.9–9 Figure 9–7 The Initial Effects of Monetary Policy with Fixed Exchange Rates

10. Copyright © 2004 South-Western. All rights reserved.9–10 Figure 9–8 The Final Effects of a Monetary Policy Expansion without Sterilization

11. Copyright © 2004 South-Western. All rights reserved.9–11 Figure 9–9 The Initial Effects of a Rise in Government Spending with a Fixed Exchange Rate

12. Copyright © 2004 South-Western. All rights reserved.9–12 Figure 9–10 The Final Effects of an Increase in Government Spending without Sterilization

13. Copyright © 2004 South-Western. All rights reserved.9–13 Figure 9–11 The Effects of an Increase in the Money Stock with Floating Exchange Rates

14. Copyright © 2004 South-Western. All rights reserved.9–14 Figure 9–12 The Effects of an Increase in Government Spending with a Floating Exchange Rate

15. Copyright © 2004 South-Western. All rights reserved.9–15 Source: Richard Payne and Paolo Vitale, “A Transaction Level Study of the Effects of Central Bank Interventions on Exchange Rates,” Centre for Economic Policy Research Discussion Paper No. 3085, November 2001. Figure 9–13 Swiss National Bank Foreign Exchange Market Interventions since 1986