Chapter16

OutputandtheExchangeRateintheShortRun

Thischapterbuildsontheshortrun

andlongmodelsofexchangeratestoexplainhowoutputisrelatedtoexchangeratesintheshortrun.IntroduceDeterminantsofAggregateDemandinanOpenEconomyOutputMarketEquilibriumIntheShoutRun:theDDScheduleAssetMarketEquilibriumIntheShoutRun:theAAScheduleShoutRunEquilibriumForanEconomy:DD—AAScheduleTemporaryChangesinMonetaryandFiscalPolicyIntroduceInflationBiasandOtherProblemsPermanentShiftsinMonetaryandFiscalPolicyMacroeconomicPolicyandtheCurrentAccountGradualTradeFlowAdjustmentandtheCurrentAccountDynamics—TheJCurve1.DeterminantsofAggregateDemandinanOpenEconomyAggregateDemand:Inshortrun,aggregatedemandistheaggregateamountofgoodsandservicesdemandedbyhouseholdsandfirmsthroughouttheworld.country'soverallshort-runoutputleveldependsontheaggregatedemandforitsproductsD=C+I+G+CA

(inchapter12)C(consumptionexpenditure)I(investmentexpenditure)G(governmentpurchases)CA(currentaccount):netexportdemand=EX-IMIandGisgiven1.1DeterminantsofConsumptionDemandconsumeasdependingondisposableincome,Yd(thatis,nationalincomelesstaxes,Y—T).C=C(Yd)consumptiondemandanddisposableincomearepositively(disposableincome↑consumptiondemand↑)consumptiondemandgenerallyrisesbylessbecausepartoftheincomeincreaseissaved.1.2DeterminantsofCurrentAccountCAisdeterminedbytwomainfactors:realexchangerate:(q=EP*/Pinchapter13)

affectthecurrentaccountbyreflectingchangesinthepricesofdomesticgoodsandservicesrelativetoforeign.q=EP*/Pq(realexchangerate)isdomesticcurrencyrealexchangerateagainstforeigncurrencyE(thenominalexchangerate)isthepriceofforeigncurrencyintermsofdomestic,P*istheforeignpricelevelPisthehomepriceleveldomesticdisposableincome(Yd):

affectthecurrentaccountthroughitseffectontotalspendingbydomesticconsumers.CA=CA(q,Yd)=CA(EP*/P,Yd)

1.3HowRealExchangeRateChangesAffecttheCurrentAccountCA≈EX–IMeffectsonEXRealExchangeRate’sriseforeignproductsmoreexpensiveForeigndemandingmoreofourexportsEP*/P↗EX↗CA↗,EP*/P↘EX↘CA↘effectsonIMIMdenotesthevalueofimportsmeasuredintermsofdomesticoutput,andnotthevolumeofforeignproductsvolumeeffect:shiftsonexportandimportquantitiesvalueeffect:changesthedomesticoutputworthofagivenvolumeofforeignimports.assume:volumeeffect>valueeffectEP*/P↗,homecurrency↘,IM↘,CA↗EP*/P↘,homecurrency↗,IM↗,CA↘1.4HowDisposableIncomeChangesAffecttheCurrentAccountariseinYdcausesdomesticconsumerstoincreasetheirspendingonallgoods(includingimportsfromabroad)Yd↗,IM↗,EX,CA↘2.TheEquationofAggregateDemandD=C+I+G+CAC=C(Yd)=C(Y-T)CA=CA(EP*/P,Yd)=CA(EP*/P,Y–T)

D=C(Y–T)+I+G+CA(EP*/P,Y–T)

moresimply

D=D(EP*/P,Y–T,I,G)Aggregatedemandisafunctionofrealexchangerate(EP*/P)disposableincome(Y—T)investmentdemand(I)governmentspending(G).

2.1TheRealExchangeRateandAggregateDemandEP*/Prise,domesticgoodscheaper,importfalls,exportrises,CArises,aggregatedemandDgoesup.EP*/P↗,EX↗,IM↘,CA↗,D↗Arealdepreciationofthehomecurrencyraisesaggregatedemandforhomeoutput,arealappreciationlowers2.2RealIncomeandAggregateDemandYdrise,Crise,IMrise,CAfalls,soDmayrise,mayfallsSinceincreaseincomehavemoreeffectonconsumptionthanimportspending(C↗>CA↘)SoDrisewhenYdrisefigure16-1AggregateDemandasaFunctionofOutput2.3HowOutputIsDeterminedIntheShortRunoutputmarketisinequilibriumwhenrealoutput,Y,equalstheaggregatedemandfordomesticoutputY=D=D(EP*/P,Y–T,I,G)需求>產(chǎn)出廠商為了滿足多余需求會加大生產(chǎn)。產(chǎn)出增加，從2向1移動Output>demand企業(yè)減少產(chǎn)出，所以向1移動4.OutputMarketEquilibrium:TheDDScheduleOutput,theExchangeRate,andOutputMarketEquilibriumwhenoutputmarketequilibriumexchangerateandoutputfigure16-3illustrates:withfixedP*andPdomesticcurrencyagainstforeigncurrency↘(ariseinEfromE1toE2)oreigngoodsandservicesmoreexpensiveandCA↗,andaggregatedemandscheduleupwardfromD1toD2becauseDupward,OutputexpandsfromY1toY2asfirmsfindthemselvesfacedwithexcessdemand.analyzetheeffectsofachangeinP*orPonoutputriseintherealexchangerateEP*/P(whetherduetoariseinE,ariseinP*,orafallinP)willcauseanupwardshiftintheaggregatedemandfunctionandanexpansionofoutput,allelseequal.fallinEP*/P,willcauseadownwardshiftinaggregatedemandfunctionandoutputtocontract,allelseequal.4.1DerivingtheDDScheduleDDscheduleshowsallcombinationsofoutputandtheexchangeratewhenoutputmarketisinshort-runequilibrium(aggregatedemand=aggregateoutput)FigureleftshowshowtoderivetheDDschedulewhichrelatesEandYwhenPandP*arefixedPoint1ontheDDgivestheoutputlevelY1atwhichaggregatedemandequalsaggregatesupplywhentheexchangerateisE1.AdepreciationofthecurrencytoE2leadstothehigheroutputlevelY2accordingtothefigure'supperpart,andthisinformationallowsustolocatepoint2onDD.FactorsthatShifttheDDSchedule1.G↑D↑，DDScheduletoshifttotherightfigure16-5showes:ariseingovernmentpurchases

fromG1toG2,givenafixedexchangerateofE°E°leadstoanequilibriumoutputlevelY1

toY2point1isonepointonDDAnincreaseinGcausestheaggregatedemandtoshiftupwardtoanewpoint2onDDsummary：aincreaseinGcausesDDtoshifttotheright.Similarly,adecreaseinGcausesDDtoshifttotheleftFactorsThatShifttheDDSchedule2.AchangeinTT↑D↓，DDScheduletoshifttotheleft3.AchangeinII↑D↑，DDScheduletoshifttotheright4.AchangeinPP↑D↓，DDScheduletoshifttotheleft5.AchangeinP*P*↑D↑，DDScheduletoshifttotheright6.AchangeinCC↑D↑，DDScheduletoshifttotheright7.AdemandshiftbetweenforeignanddomesticgoodsDemandshiftfromformforeigntodomestic，D↑，DDscheduletoshifttotheright5.AssetMarketEquilibriuminthe

ShortRun:TheAAScheduleDDscheduleshowsallexchangerateandoutputlevelsatwhichtheoutputmarketisinshort-runequilibriumequilibriumintheeconomyasawholerequiresequilibriumintheassetmarketsaswellasintheoutputmarketThescheduleofexchangerateandoutputcombinationsthatareconsistentwithequilibriuminthedomesticmoneymarketandtheforeignexchangemarketiscalledtheAAschedule.5.1Output,theExchangeRate,andAssetMarketEquilibriumforeignexchangemarketinequilibriumInChapter13:theinterestparityconditionR=R*+(Ee-E)/ERistheinterestrateondomesticcurrencydepositsandR*istheinterestrateonforeigncurrencydepositsdomesticmoneymarketinequilibriumInChapter14:thedomesticinterestratesatisfyingtheinterestparityconditionmustalsoequatetherealdomesticmoneysupply(Ms/P)toaggregaterealmoneydemandMs/P=L(R,Y)whentheinterestratefallsaggregaterealmoneydemandL(R,Y)risesAriseinrealoutput,Y,increasesrealmoneydemandbyraisingthevolumeofmonetarytransactionspeoplemustcarryoutafallinrealoutputreducesrealmoneydemandbyreducingtransactionsneedsfigure16-6showes:lowerpartofthefigure,Y1andMs/P,R1clearsthehomemoneymarket(point1),E1clearstheforeignexchangemarket(point1').AriseinoutputfromY1toY2raisesmoneydemandschedulefromL(R,Y1)to

L(R,Y2),raisetheequilibriumdomesticinterestratetoR2(point2).Eeand

R*fixed,thedomestic

currencyappreciatefromEltoE2tobringtheforeign

exchangemarketbackintoequilibriumatpoint2'.summary:ForassetmarketstoremaininequilibriumariseindomesticoutputmustbeaccompaniedbyanappreciationofthedomesticcurrencyY↑,Ms/P不變，R↑，Ee，P*不變，E↓，domesticcurrency↑allelseequal,andafallindomesticoutputmustbeaccompaniedbyadepreciation.Y↓,Ms/P不變，R↓，Ee，P*不變，E↑，domesticcurrency↓5.2DerivingtheAAScheduleFigure16-7showstheAAschedule.AAschedulerelatesexchangeratesandoutputlevelsthatkeepthemoneyandforeignexchangemarketsinequilibriumariseinY1toY2willproduceanappreciationofthedomesticcurrency,thatis,afallintheexchangeratefromE1toE2.TheAAschedulethereforehasanegativeslope,asshown.5.3FactorsthatShifttheAASchedule1.AchangeinMs.

fixedoutput,Ms↑domesticcurrency↓E↑AAtoshiftupward.Similarly,afallinMscausesAAtoshiftdownward.2.AchangeinP.P↑realmoneysupply↓R↑E↓TheeffectofariseinPisthereforeadownwardshiftofAA.AfallinPresultsinanupwardshiftofAA.3.AchangeinEe.Ee↑E↑domesticcurrency↓AAshiftsupwardwhenariseintheexpectedfutureexchangerateoccurs.Itshiftsdownwardwhentheexpectedfutureexchangeratefalls.2024/4/3235.3FactorsthatShifttheAASchedule4.AchangeinR*.R*↑shiftsthedownward-slopingscheduleatthetopofFigure16-6totheright.domesticcurrencymustdepreciateE↑AriseinR*thereforehasthesameeffectonAAasariseinEe:Itcausesanupwardshift.AfallinR*resultsinadownwardshiftofAA.5.Achangeinrealmoneydemand.AreductioninmoneydemandimpliesaninwardshiftoftheaggregaterealmoneydemandfunctionL(R,Y)foranyfixedlevelofY,anditthusresultsinalowerinterestrateandariseinE.Areductioninmoneydemandthereforehasthesameeffectasanincreaseinthemoneysupply,inthatitshiftsAAupward.TheoppositedisturbanceofanincreaseinmoneydemandwouldshiftAAdownward.Short-RunEquilibriumforanOpenEconomy:

puttingtheDDandAASchedulesTogetherAshort-runequilibriumfortheeconomyasawholemustlieonbothschedulesbringaboutequilibriumsimultaneouslyintheoutputandassetmarketsFigure16-8combinestheDDandAAschedulestolocateshort-runequilibrium.TheintersectionofDDandAAatpoint1istheonlycombinationofexchangerateandoutputconsistentwithboththeequalityofaggregatedemandandaggregatesupplyandassetmarketequilibrium.Short-RunEquilibriumforanOpenEconomy:

puttingtheDDandAASchedulesTogether0EY1DD1E1E32AAE23在3這個點時，產(chǎn)出市場上有過度的需求，所以廠商會增加產(chǎn)出來滿足過度的需求，所以會從點3到點1，此時資本市場和產(chǎn)出市場同時達到了均衡，但是產(chǎn)出市場需要一定的時間，不會像資本市場的反應(yīng)如此迅速。在2點時，產(chǎn)出市場和資本市場都處于不平衡中，此時的匯率過高，人們有下降的預期，會迅速使2下降到3點，在資本市場處于均衡。6.TemporaryChangesinMonetaryandFiscalPolicywecanstudyhowshiftsingovernmentmacroeconomicpoliciesaffectoutputandtheexchangerateTwotypesofgovernmentpolicy:monetarypolicy:worksthroughchangesinthemoneysupplyfiscalpolicy:worksthroughchangesingovernmentspendingortaxesInthissectionweexaminetemporarypolicyshiftsEe,orpricelevel,P*,andthatthedomesticpricelevel,P,isfixedintheshortrun.6.1MonetaryPolicyAnincreasedmoneysupplyshiftsAA1upwardtoAA2,notaffectthepositionofDD.Theupwardshiftoftheassetmarketequilibriumschedulemovestheeconomyfrompoint1,withexchangerateE1andoutputY1topoint2,withexchangerateE2andoutputY2.Anincreaseinthemoneysupplycausesadepreciationofthedomesticcurrency,anexpansionofoutput,andthereforeanincreaseinemployment.6.2fiscalpolicyAtemporaryfiscalexpansionshiftstheDDscheduletotherightbutdoesnotmoveAA.Initiallytheeconomyisatpoint1,withE1andY1fiscalexpansionmovestheeconomytopoint2,causingthecurrencytoappreciatetoE2andoutputtoexpandtoY2.6.4PoliciestoMaintainFullEmploymentfigure16-12ashiftisadecreaseinaggregatedemandfordomesticDD1toDD2point2,thecurrencyhasdepreciatedtoE2andoutput,atY2restorefullemploymentAtemporarymoneysupplyincreaseshiftstoAA2andplacestheeconomyatpoint3restoresfullemploymentbutcausesthehomecurrencytodepreciateevenfurther暫時的擴張財政政策可以使DD1重新會到DD2需求的突然的減少會使DD1左移到DD2，2點建立新的平衡點，E2，Y2短暫的貨幣政策可以使AA1上移到AA2，重新實現(xiàn)充分就業(yè)atemporaryincreaseinthedemandformoneydownwardshiftofAA1toAA2，frompoint1topoint2.AtemporarymoneysupplyincreaseshiftstoAA1andmovesbacktopoint1TemporaryfiscalexpansionshiftsDD1toDD2andrestoresfullemploymentatpoint3IncreaseinmoneydemandraisesinterestratesandappreciatesthedomesticcurrencyTemporaryfiscalpolicycouldincreaseaggregatedemandandoutputTemporarymonetarypolicycouldincreasemoneysupplytomatchmoneydemand6.5inflationBiasandOtherProblemsofPolicyFormulation1.Stickynominalpricesnotonlygivegovernmentsthepowertoraiseoutputwhenitisabnormallylow,butalsomaytemptthemtocreateapoliticallyusefuleconomicboom2.Inpracticeitissometimeshardtobesurewhetheradisturbancetotheeconomyoriginatesintheoutputorassetmarkets.3.Real-worldpolicychoicesarefrequentlydeterminedbybureaucraticnecessitiesratherthanbydetailedconsiderationofwhethershockstotheeconomyarereal(thatis,theyoriginateintheoutputmarket)ormonetary.4.Anotherproblemwithfiscalpolicyisitsimpactonthegovernmentbudget.5.Policiesthatappeartoactswiftlyinoursimplemodeloperateinrealitywithlagsofvaryinglength.PermanentShiftsinMonetaryand

FiscalPolicy1.MonetaryPolicy2.FascalPolicyMonetaryPolicyExchangrateEYfE2AA2DDAA1E1Y1123OutputYShort-runEffectsofAPermanentMonetaryPolicySet,P,P'andR'unchanged

PermanentincreasewhentheMS,theAAcurvetotheright.

∴newequilibriumpointat2,theexchangerateandoutputbothincreased,andmorethanatemporaryincreaseincurrencyinwhichthelevelof3.Conclusion:Theincreaseinthepermanentmoneysupply,short-termincreaseoutput,expandemployment.EYfE1AA2DD1AA1E2Y2123DD2AA3

E3YThelongterm,whentheoutputabovefullemploymentlevelofY1,theriseofpricesP

∴DDcurvetotheleft,theAAcurvetotheleft,untilyoupaythefullemploymentlevelofY1,point3.Conclusion:Theincreaseinthepermanentmoneysupply,long-termprices,exchangeratesrise,whileoutputhasnoeffect.long-runsdjustmenttoAPermanentMonetaryPolicy

APERMANENTFISCALEXPANSIONIftheeconomystartsatlong-runequilibrium,apermanentchangeinfiscalpolicyhasnoneteffectonoutput.Instead,itcausesanimmediateandpermanentexchangeratejumpthataffectsexactlythefiscalpolicy’sdirecteffectonaggregatedemandEffectofapermanentfiscalexpansionEYYfAA1DD1DD2132E2E1AA2PermanentreductionofthepermanentincreaseofGorT,willresultintheDDcurverighttoaDD2,currencyappreciation,anincreaseinoutput.Meanwhile,withthecurrencyappreciation,theexpectedexchangeratedecline,theAAcurvelefttomoveofAA2toreachanewequilibriumpoint,Theexchangeratedropped,thecurrencyappreciation,whiletheoutputunchanged.Conclusion:underthefloatingexchangeratesystem,the,fiscalpolicyinvalidated.MacroeconomicPolicyandtheCurrentAccountTheXXScheduleSupposeacountrywantstoholdadesiredlevelofcurrentaccount(say,X).ThatisCA(SP*/P,Y-T)=XEYDDXXConclusion:XXcurveisthecurveofarightangle,andflatthantheDDcurve.EquilibriumpointintheXXcurveabovethemeantoimprovetheinternationalbalanceofpayments;inthebottommeansthattheinternationalbalanceofpaymentsdeterioration.meaning:Referstothecurrentaccountbalanceismaintainedatacertainlevel,thevariouscombinationsoftheexchangerateandoutput.Shape:LetCA(EP'/P,YT)=Xisintheotherconditionsremainunchanged,Yincreaseinnetexportdemand,theCAdecreased,inordertomaintaintheCAconstant,Emustris