IMF Chapter 4 Flashcards
What are factors shifting the IS schedule?
Changes in investment, government expenditure or exports.
What factors shift the LM curve>
A change in the domestic money supply
Why does a the LM curve shift to the right for a increased money supply?
The increased supply is only held if the is an increase in the income which leads to a rise in the transaction demand.
What tools can be used to achieve IB and EB?
Absorption: (A = C + I + G)
+S to improve CA
How does the IS curve work?
-r -> +I -> Y<C + I + G + CA, so Y must increase
How does the LM curve work?
-r -> +L -> M < L -> L must decrease -> Y must decrease
Why does excess money demand incur decreased spending?
Since excess money demand means that people rather hold onto their money and want to increase their holdings (r link) than spend it, thus decreasing Y.
How does the BP curve work (r* fixed) ?
-r -> capital outflow -> -K -> BoP < 0 -> -CA -> -Y
What happens to the BP curve in changes of capital mobility?
BP curve becomes horizontal if there is perfect capital mobility and vertical in case of per capital immobility
What does increased mobility mean in the BP schedule?
A change in interest requires a larger change in the income
What are the three cases for the exchange rate affecting the IS-LM-BP curve? (+S)
- +S -> CA+ -> Yd>Y -> Y must increase
- +S -> P+ (More transaction demand -> More money demand)-> L > M -> Y must decrease
- +S -> BoP > 0 -> Y must increase
What is the Monetary policy trilemma?
- Fixed exchange rate
- Perfect capital mobility
- Monetary policy autonomy
What is the fiscal policy trilemma?
- Floating exchange rate
- Perfect capital mobility
- Fiscal policy effectiveness
What do we find out if we analyze the impossible trinity in the Mundell-Fleming model?
- In a fixed exchange rate regime, the monetary policy is ineffective
- In a floating exchange rate regime, the fiscal policy is ineffective
What is internal balance?
- Full employement
- Stable prices (inflation)
