week 6 and 7 open economy macroeconomics

Question 1

what is the difference between endogenous and exogenous variables?

Answer 1

endogenous variables can be found within the model (r,Y) and exogenous variables outside the model (C,G,I,X,M,P) and have ability to shift/change the relationship between r and Y

Question 2

what does the goods market include?

Answer 2

Y= C+I+G+ (X-M)
- line is downward sloping because as interest rates decline, people and businesses tend to borrow more money, which they spend
- the IS-curve represent all equilibria where income and expenditure are equal

Question 3

what does the money market include?

Answer 3

• line is upward sloping because as output rises, people usually demand more money. the added demand for money results in higher interest rates
• the LM curve represents where amount of money available and demand for money are equal

Question 4

what does the forex market include?

Answer 4

• upward sloping; as interest rates rise, capital is attracted into system. in order to balance rising inflow, you need more outflow in form of import spending
• is IS and LM curve intersect above FE curve, more capital inflows than needed –> BoP surplus. This means pressure to appreciate.