1 / 17

Chapter 9

Chapter 9. Chapter 9 Essential macroeconomic tools. Output and prices. Economic activity is measured by the GDP (gross domestic product) GDP = sum of all production = sum of all sales = sum of all incomes Nominal GDP (measured) vs. Real GDP (computed taking into account inflation)

davin
Download Presentation

Chapter 9

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Chapter 9

  2. Chapter 9 Essential macroeconomic tools

  3. Output and prices • Economic activity is measured by the GDP (gross domestic product) • GDP = sum of all production = sum of all sales = sum of all incomes • Nominal GDP (measured) vs. Real GDP (computed taking into account inflation) • GDP trend is increasing • Actual GDP is above or below trend, according to business cycles

  4. Output gap: the difference between trend and actual GDP

  5. Choice of exchange rate • The business cycles are undesired and the most governments try to iron them out through fiscal and monetary policies • Does the exchange rate regime, i.e. selecting a system with fixed or floating exchange rates, influence the effect of macroeconomic policies? • Let us look at this Aggregate Demand (AD) and aggregate supply (AS) setting: • Aggregate supply (AS): upwards sloping. As output gap increases threat of unemployment moderates wages and firms cut price • Aggregate demand (AD): downward sloping. Higher prices erode purchasing power and external competitiveness and output gap decreases • Changes in aggregate demand, e.g. a boom abroad: shifts aggregate demand up (AD’)

  6. The AD-AS diagram

  7. Long Term: Neutrality of Money Comparison between France and Switzerland Growth rate in France less growth rate in Switzerland Year to year: Nothing really visible

  8. Long Term: Neutrality of Money Comparison between France and Switzerland Growth rate in France less growth rate in Switzerland Five-year averages: Something emerges

  9. Long Term: Neutrality of Money Comparison between France and Switzerland Growth rate in France less growth rate in Switzerland

  10. PPP: An Implication of Long Term Neutrality • The real exchange rate: • defined as  = EP/P* • PPP: E offsets changes in P/P* • so  is constant. • Equivalently:

  11. The real exchange rate Example: real exchange rate of euro in terms of dollar • Price of basket of European goods: P= €100 • Nominal exchange rate ($/€): E = 1.3$/€ • Price of basket of American goods: P*= $130 • real exchange rate: = E x P/P* = €100x 1.3$/€ : $130 = 1 basket of American goods for 1 basket of European goods NOTE: when real exchange rate appreciates, competitiveness declines as more baskets of goods in the USA would need to be traded for 1 basket of European goods.

  12. Real versus nominal exchange rate appreciation

  13. The Balassa-Samuelson Effect Increasing real exchange rates in new EU members (Annual % change, 1996-2008)

  14. Short Term Non-Neutrality of Money • From AD-AS: the short-run AS schedule. • So monetary policy matters in the short run. • Channels of monetary policy: • the interest rate channel • the credit channel • the stock market channel • the exchange rate channel.

  15. Exchange Rate Regimes and Policy Effectiveness

  16. Exchange Rate Regimes and Policy Effectiveness

  17. When Does the Regime Matter? • In the short run, changes in E are mirrored in changes in  = EP/P*: P and P* are sticky. • In the long run,  is independent of E: P adjusts. • If P is fully flexible, the long run comes about immediately and the nominal exchange rate does not affect the real economy. • Put differently, the choice of an exchange rate regime has mostly short-run effects because prices are sticky.

More Related