1、MACROECONOMIC POLICY IN AN OPEN ECONOMY CHAPTER 7 Economic Objectives of NationsObjectives of macroeconomic policyInternal balance External balanceLong-term economic growthReasonably equitable distribution of national income2Economic Objectives of NationsInternal balanceEconomic stability at full em

2、ploymentA fully employed economyNo inflationExternal balanceWhen it realizes neither deficits nor surpluses in its current accountOverall balanceInternal balance and external balance3Policy InstrumentsExpenditure-changing policiesAlter the level of total spending (aggregate demand) for goods and ser

3、vicesProduced domestically and importedFiscal policyChanges in government spending and taxesMonetary policyChanges in the money supply and interest ratesCentral bank4Policy InstrumentsExpenditure-switching policiesModify the direction of demandShifting it between domestic output and importsUnder fix

4、ed exchange rates and trade deficitDevalue its currencyUnder managed floating exchange-rate and to increase its competitiveness Depreciate its currency5Policy InstrumentsDirect controls Government restrictions on the market economyTo control particular items in the current accountTo restrain capital

5、 outflowsTo stimulate capital inflows6Aggregate Demand and Aggregate SupplyAggregate demand-aggregate supply modelAggregate demand curve (AD)Level of real output (real GDP) purchased at alternative price levels during a given yearSpending by domestic consumers, by businesses, by government, and by f

6、oreign buyers (net exports)As the price level fallsThe quantity of real output demanded increases7Aggregate Demand and Aggregate SupplyAggregate demand-aggregate supply modelAggregate supply curve (AS)Relation between the level of prices and amount of real output that will be produced by the economy

7、 during a given yearUpward sloping Per-unit production costs and prices increase as real output increasesEquilibrium: AD = AS8Aggregate Demand and Aggregate SupplyShifts in aggregate demand curveChanges in the determinants of ADConsumption, investment, government purchases, or net exportsShifts in t

8、he aggregate supply curve Changes in the price of resources, technology, business expectations9The economy is in equilibrium where the aggregate demand curve intersects the aggregate supply curve. This intersection determines the equilibrium price level and output for the economy. Increases (decreas

9、es) in aggregate demand or aggregate supply result in rightward (leftward) shifts in these curves.10Macroeconomic equilibrium: the aggregate demand-aggregate supply modelFIGURE 7.1Monetary and Fiscal Policy in a Closed EconomyIf aggregate output is too low and unemployment is too highGovernment - in

10、crease aggregate demand for real outputExpansionary monetary or fiscal policiesIncrease in the countrys real GDP11Monetary and Fiscal Policy in a Closed EconomyIf inflation is troublesomeGovernment - reduce the level of aggregate demand for real outputContractionary monetary or fiscal policyUpward p

11、ressure on prices is softened and inflation moderatesExpansionary monetary or fiscal policyIncrease in aggregate demand Increase in domestic consumption, investment, or government spending12(a) Expansionary monetary or fiscal policy in a closed economy.13Effect of an expansionary monetary or fiscal

12、policy on equilibrium real GDP (a)FIGURE 7.2Monetary and Fiscal Policy in an Open EconomyExpansionary monetary or fiscal policyInitial effect: Increase in aggregate demand Increase in domestic consumption, investment, or government spendingSecondary effect: Increase or decrease in aggregate demandCh

13、anging net exports and other determinants of aggregate demand14Monetary and Fiscal Policy in an Open EconomyIf the initial and secondary effects - increases in aggregate demandStrengthened effect of expansionary policyIf the initial and secondary effects - conflicting impactsWeakened effect15Monetar

14、y and Fiscal Policy in an Open EconomyExpansionary fiscal policy; fixed exchange ratesInitial effect: Increase aggregate demandSecondary effect: Increase aggregate demandBudget deficit; Higher interest rateIncreased demand for domestic currency in foreign-currency marketPurchase foreign currency wit

15、h domestic currencyIncrease in the domestic money supplyIncrease the amount of loanable fundsFiscal policy - strengthened under fixed exchange rates16Monetary and Fiscal Policy in an Open EconomyExpansionary monetary policy; fixed exchange ratesInitial effect: Increase aggregate demandReduce the dom

16、estic interest rateIncreased consumption and investmentSecondary effect: Reduce aggregate demandDecreasing demand for currencyPurchase domestic currency with foreign currencyDecrease in money supply and loanable fundsMonetary policy - weakened under fixed exchange rates17Monetary and Fiscal Policy i

17、n an Open EconomyExpansionary monetary policy; floating exchange ratesInitial effect: Increase aggregate demandReduce the domestic interest rateIncreased consumption and investmentSecondary effect: Increase aggregate demandDomestic currency depreciatesIncrease in exports, decrease in imports, improv

18、ement in current accountMonetary policy strengthened under floating exchange rates18Monetary and Fiscal Policy in an Open EconomyExpansionary fiscal policy; floating exchange ratesInitial effect: Increase aggregate demandSecondary effect: Decrease aggregate demandBudget deficit; Higher interest rate

19、Increased demand for domestic currency in the foreign-exchange marketDomestic currency appreciates; Falling exportsRising imports, Deteriorating current accountFiscal policy weakened, floating exchange rates19(b) Expansionary monetary policy or fiscal policy in an open economy. (1) The policys initi

20、al and secondary effects reinforce each other. (2) The policys initial and secondary effects conflict with each other.20Effect of an expansionary monetary or fiscal policy on equilibrium real GDP (b)FIGURE 7.321The effectiveness of monetary and fiscal policy in promoting internal balance for an econ

21、omy with a high degree of capital mobilityTABLE 7.1Exchange-Rate RegimeMonetary PolicyFiscal PolicyFloating exchange ratesStrengthened Weakened Fixed exchange ratesWeakened Strengthened Macroeconomic Stability and the Current Account: Policy Agreement vs. Policy ConflictRecession + current account d

22、eficitFloating exchange ratesExpansionary monetary policy to combat recessionCurrency depreciationRise in exports and fall in importsReduce the current account deficitA single economic policy promotes overall balance22Macroeconomic Stability and the Current Account: Policy Agreement vs. Policy Confl

23、ictInflation + current account deficitContractionary monetary policy to combat inflationIncrease in domestic interest rateCurrency appreciationFall in exports and rise in importsLarger current-account deficitPolicy conflict: monetary policy (or fiscal policy) alone will not restore both internal and

24、 external balance23Inflation With UnemploymentInflation with unemploymentInternal balance cannot be achieved just by manipulating aggregate demandReduce AD to decrease inflationIncrease AD to decrease unemploymentOverall balance - three separate targetsCurrent-account equilibriumFull employmentPrice

25、 stability24International Economic-Policy CoordinationEconomic relations among nationsConflictIndependence Integration Policy cooperationOfficials from different nations meet to evaluate world economic conditionsPolicy coordinationFormal agreement among nations to initiate particular policies25Relat

26、ions among national governments can be visualized along a spectrum ranging from policy conflict to policy interdependence. Between these extremes are a variety of forms of cooperation and coordination.26Relations among national governmentsFIGURE 7.4G-20 agrees to cooperate on global economic policy:

27、 international policy coordinationWorld economy - out of balance with the U.S.U.S. most of the global current-account deficitChina, Japan, and Germany most of the global surplusUnited StatesConsumed more than it producedInvested more than it saved Borrowed from trading partners27G-20 agrees to coope

28、rate on global economic policy: international policy coordination2009, Group of 20 nations - The G-20 plan:Coordinate macroeconomic policiesFoster balanced economic growthChina and Japan - rely less on exports and more on domestic consumptionThe U.S. - curtail its budget deficitEurope - difficult st

29、ructural reforms to increase business investment28G-20 agrees to cooperate on global economic policy: international policy coordinationG-20Members will need periodically to review each nations policiesAct by moral suasion, not sanctions29International Economic-Policy CoordinationObstacles to success

30、ful policy coordinationSome nations give higher priority to price stability, or to full employment, than othersSome nations have a stronger legislatureOr weaker trade unions, than othersThe party pendulums in different nationsShift with elections occurring in different yearsOne nation may experience

31、 economic recession While another nation experiences rapid inflation30International Economic-Policy CoordinationPlaza Agreement of 1985, G-5The United States, Japan, Germany, Great Britain, and FranceOvervalued U.S. dollarTwin U.S. deficits (trade and federal budget) were too large31International Ec

32、onomic-Policy CoordinationPlaza Agreement of 1985, G-5Each country Specific pledges on macroeconomic policyAgreed to initiate coordinated sales of the dollarBy 1986, dollar had dramatically depreciatedLouvre Accord of 1987, G-5New concern: uncontrolled dollar plungeIntervention policies curbing the

33、pace of the dollars depreciationOther macroeconomic adjustments32International Economic-Policy Coordination2000, G-7The United States, Canada, Japan, the United Kingdom, Germany, France, and ItalyCoordinated purchases of the euro to boost its valueFrom $0.84 per euro to more than $0.88 per euroWithi

34、n two weeks following the intervention, the euros value slid to an all-time low33Monetary and fiscal policy respond to financial turmoil in the economy2008-2009 recessionFederal ReserveLowering the federal funds rate target to virtually zeroExpanded its role as lender of last resortCredit to banks and other financial institutions as well as businesses34Monetary and fiscal policy respond to financial turmoil in the economy2008-2009 recessionU.S. government Economic Stimul