1. McGraw-Hill/Irwin © 2012 The McGraw-Hill Companies, All Rights Reserved Chapter 23: Internal and External Balance with Fixed Exchange Rates

2. Copyright  2012 by The McGraw-Hill Companies, Inc. All rights reserved. 23-2 A Simplified Balance Sheet

3. Copyright  2012 by The McGraw-Hill Companies, Inc. All rights reserved. 23-3 Figure 23.1 Key Balance-Sheet Items, the Fed and ECB, December 31, 2010 (Billions of U.S. Dollars)

4. Copyright  2012 by The McGraw-Hill Companies, Inc. All rights reserved. 23-4 Exports Plus Imports as a Percentage of GDP Figure 23.2 Expanding the Money Supply Worsens the Balance of Payments with Fixed Rates

5. Copyright  2012 by The McGraw-Hill Companies, Inc. All rights reserved. 23-5 Figure 2.2 The Market for Motorbikes: Demand and Supply Figure 23.3 Payments and Adjustments for a Surplus Country with Fixed Rates

6. Copyright  2012 by The McGraw-Hill Companies, Inc. All rights reserved. 23-6 Figure 23.4 Expansionary Monetary Policy with Fixed Rates

7. Copyright  2012 by The McGraw-Hill Companies, Inc. All rights reserved. 23-7 Figure 23.5 How Expansionary Fiscal Policy Affects the Balance of Payments with Fixed Rates

8. Copyright  2012 by The McGraw-Hill Companies, Inc. All rights reserved. 23-8 Figure 23.6 Expansionary Fiscal Policy with Fixed Exchange Rates

9. Copyright  2012 by The McGraw-Hill Companies, Inc. All rights reserved. 23-9 Figure 23.7 With Perfect Capital Mobility, Monetary Policy Is Impotent but Fiscal Policy is Strong

10. Copyright  2012 by The McGraw-Hill Companies, Inc. All rights reserved. 23-10 Figure 23.8 An Adverse International Capital-Flow Shock

11. Copyright  2012 by The McGraw-Hill Companies, Inc. All rights reserved. 23-11 Figure 23.9 An Adverse International Trade Shock

12. Copyright  2012 by The McGraw-Hill Companies, Inc. All rights reserved. 23-12 Figure 23.10 Policies for Internal and External Balance

13. Copyright  2012 by The McGraw-Hill Companies, Inc. All rights reserved. 23-13 A Tale of Three Countries

14. Copyright  2012 by The McGraw-Hill Companies, Inc. All rights reserved. 23-14 A Tale of Three Countries

15. Copyright  2012 by The McGraw-Hill Companies, Inc. All rights reserved. 23-15 Figure 23.11 How Monetary and Fiscal Policy Could Combine to Cure Both Unemployment and Balance-of-Payments Deficit

16. Copyright  2012 by The McGraw-Hill Companies, Inc. All rights reserved. 23-16 Figure 23.12 Monetary-Fiscal Recipes for Internal and External Balance

17. Copyright  2012 by The McGraw-Hill Companies, Inc. All rights reserved. 23-17 Figure 23.13 Devaluation of the Country’s Currency

18. Copyright  2012 by The McGraw-Hill Companies, Inc. All rights reserved. 23-18 Figure 23.14 Devaluation Affects of Trade Balance

19. Copyright  2012 by The McGraw-Hill Companies, Inc. All rights reserved. 23-19 Figure 23.15 The J Curve: How the Trade Balance Probably Responds to a Drop in the Value of a Country’s Currency