Chapter 14 Flashcards
if the exchange rate is fixed and credible what does this mean?
e ^e/e = 0
IR on assets with the same default risk must be the same as abroad
CB cant control money supply or interest rate
same for members of MU - fiscal policy is very important for them
why is the multiplier effect smaller in the open economy vs. closed?
some part of demand is directed to foreign goods (leakage)
what are the effects of monetary policy with a floating ER?
monetary policy affects consumption , investment and net exports via. exchange rate
therefore monetary policy very powerful
what is the IS* Equation?
Y = C (yd, ye - te, i - inflation e, A) + I (i - inflation e, Ye, K) + G + NX ((1 + I)/(1 + i* eep/P, Y, Y)
why is the IS* curve flatter than the IS curve?
it incorporates the effect of the interest rate via exchange rate channel
why is fiscal policy less effective if money supply unchanged?
there is crowding out of NX via the exchange rate. The effect of fiscal policy depends on whether the CB keeps IR or money supply unchanged
what does a persistent demand shock require?
requires adjustment of the real exchange rate
how is this adjustment achieved with a fixed ER? What about floating?
fixed - inflation or deflation
floating - can be eased by the adjustment of the nominal exchange rate
what does the mundell flemming model say about the floating ER?
a floating exchange rate will work as a shock absorber
what does exchange rate movements help to do and why?
since inflation depends on the output gap, exchange rate movements will also help to avoid inflationary pressures and deflation in the SOE
