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The Transition

The Transition. In the transition: P  so that DD-curve shifts to the left so that AA-curve shifts to the left. S. 3. 2. 1. Y. 11. A Permanent Fiscal Expansion. S. (3 - transitory fiscal expansion). AA shifts down because. 1. 3. 2. Y.

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The Transition

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  1. The Transition In the transition: P so that DD-curve shifts to the left so that AA-curve shifts to the left S 3 2 1 Y 11

  2. A Permanent Fiscal Expansion S (3 - transitory fiscal expansion) AA shifts down because 1 3 2 Y Result: Monetary policy is effective in the short run while fiscal policy is not effective. 12

  3. Change in (assume that is given) S S S 2 1 Y Y Y 13

  4. Phillips Curve ) given) Long run Short Run 0 14

  5. Japan 1999 slump zero rate of interest (liquidity tramp) Expanded Fiscal Policy ( Deficit = 7-8% of GDP ) DD S DD’ AA Y Yen appreciated 12 percent in the May - September period vis a vis $ Output growth for 2000: 0.5% forecast 15

  6. Capital Controls CA=0 D D Results: (1) monetary policy is ineffective (2) fiscal policy is effective 16

  7. Closed Capital Account marginal propensity to consume marginal propensity to import 17

  8. Open Capital Account open economy multiplier 18

  9. Closed Capital Account (1) (2) open economy multiplier closed economy multiplier 19

  10. Exchange-rate/Capital-flows Possibilities Triangle Capital Controls economic freedom flexible exchange rate fixed exchange rate stabilized exchange rate fluctuations stabilized output fluctuations 3 Policy Targets: (1) stabilized exchange rate fluctuations (2) stabilized output fluctuations (3) economic freedom 20

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