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ISLMBP Applications to EMU Economics

ISLMBP Applications to EMU Economics. ISLMBP Applications to EMU Economics. 1) Fixed Exchange Rates, Fiscal Policy, Low Capital Mobility 2) Fixed Exchange Rates, Fiscal Policy, High Capital Mobility 3) Fixed Exchange Rates, Monetary Policy, Low Capital Mobility

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ISLMBP Applications to EMU Economics

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  1. ISLMBP Applications to EMU Economics

  2. ISLMBP Applications to EMU Economics • 1) Fixed Exchange Rates, Fiscal Policy, Low Capital Mobility • 2) Fixed Exchange Rates, Fiscal Policy, High Capital Mobility • 3) Fixed Exchange Rates, Monetary Policy, Low Capital Mobility • 4) Fixed Exchange Rates, Monetary Policy, High Capital Mobility

  3. ISLMBP Applications to EMU Economics • 5) Flexible Exchange Rates, Fiscal Policy, Low Capital Mobility • 6) Flexible Exchange Rates, Fiscal Policy, High Capital Mobility • 7) Flexible Exchange Rates, Monetary Policy, High Capital Mobility

  4. BP 1. Fixed exchange rates, Fiscal Policy, Low Capital Mobility LM1 a r1 IS1 O Y Y1

  5. BP IS2 1. Fixed exchange rates, Fiscal Policy, Low Capital Mobility r LM1 a r1 IS1 O Y1 Y An expansionary fiscal policy:

  6. Y2 1. Fixed exchange rates, Fiscal Policy, Low Capital Mobility r BP LM1 b r2 a r1 IS2 IS1 O Y1 Y An expansionary fiscal policy: BP curve steeper than LM curve

  7. 1. Fixed exchange rates, Fiscal Policy, Low Capital Mobility r BP LM1 b r2 a r1 IS2 IS1 O Y1 Y2 Y An expansionary fiscal policy: BP curve steeper than LM curve

  8. LM2 c r3 Restoration of full equilibrium Y3 1. Fixed exchange rates, Fiscal Policy, Low Capital Mobility r BP LM1 b r2 a r1 IS2 IS1 O Y1 Y2 Y An expansionary fiscal policy:

  9. LM a r1 IS Y1 2. Fixed exchange rates, Fiscal Policy, High Capital Mobility BP Y O

  10. LM1 b BP r2 a r1 IS2 IS1 Y2 Y1 2. Fixed exchange rates, Fiscal Policy, High Capital Mobility O Y An expansionary fiscal policy

  11. 2. Fixed exchange rates, Fiscal Policy, High Capital Mobility LM1 r BP b r2 a r1 IS2 IS1 O Y Y1 Y2

  12. LM2 c r3 Restoration of full equilibrium Y3 2. Fixed exchange rates, Fiscal Policy, High Capital Mobility LM1 r BP b r2 a r1 IS2 IS1 Y O Y2 Y1

  13. 3. Fixed exchange rates, Monetary Policy, High Capital Mobility r LM1 BP a r1 IS O Y1 Y An expansionary monetary policy

  14. b r2 Y2 3. Fixed exchange rates, Monetary Policy, High Capital Mobility r LM1 LM2 BP a r1 IS O Y1 Y An expansionary monetary policy

  15. 3. Fixed exchange rates, Monetary Policy, High Capital Mobility r LM1 LM2 BP a r1 b r2 IS O Y1 Y2 Y An expansionary monetary policy

  16. Full equilibrium is restored back at point a ISLMBP analysis: fixed exchange rates r LM1 LM2 BP a r1 b r2 IS O Y1 Y2 Y An expansionary monetary policy

  17. THE OPEN ECONOMY AND ISLM ANALYSIS • Analysis under free-floating rates • effects of exchange rate changes on the BP curve

  18. Appreciation BP Movements in the BP curve r SURPLUS O Y

  19. Depreciation Movements in the BP curve r BP DEFICIT O Y

  20. LM b r2 a r1 IS2 IS1 Y2 Y1 ISLMBP analysis: floating exchange rates r BP O Y An expansionary fiscal policy

  21. ISLMBP analysis: floating exchange rates r LM b BP r2 a r1 IS2 IS1 O Y2 Y1 Y An expansionary fiscal policy

  22. ISLMBP analysis: floating exchange rates r LM b BP r2 a r1 IS2 IS1 O Y2 Y1 Y An expansionary fiscal policy

  23. BP2 c r3 Full equilibrium is restored at point c IS3 Y3 ISLMBP analysis: floating exchange rates r LM b BP1 r2 a r1 IS2 IS1 O Y2 Y1 Y An expansionary fiscal policy

  24. BP1 b r2 IS2 Y2 ISLMBP analysis: floating exchange rates r LM a r1 IS1 O Y1 Y An expansionary fiscal policy: BP curve steeper than LM curve

  25. ISLMBP analysis: floating exchange rates r BP1 LM b r2 a r1 IS2 IS1 O Y2 Y1 Y An expansionary fiscal policy: BP curve steeper than LM curve

  26. ISLMBP analysis: floating exchange rates r BP1 LM b r2 a r1 IS2 IS1 O Y2 Y1 Y An expansionary fiscal policy: BP curve steeper than LM curve

  27. BP2 c r3 Full equilibrium is achieved at point c IS3 Y3 ISLMBP analysis: floating exchange rates r BP1 LM b r2 a r1 IS2 IS1 O Y2 Y1 Y An expansionary fiscal policy: BP curve steeper than LM curve

  28. LM2 r2 b Y2 ISLMBP analysis: floating exchange rates r LM1 BP1 a r1 IS1 O Y1 Y An expansionary monetary policy

  29. ISLMBP analysis: floating exchange rates r LM1 LM2 BP1 a r1 The balance of payments deficit causes the BP line to shift downward r2 b IS1 O Y2 Y1 Y An expansionary monetary policy

  30. The depreciation causes the IS curve to shift to the right ISLMBP analysis: floating exchange rates r LM1 LM2 BP1 a r1 r2 b IS1 O Y2 Y1 Y An expansionary monetary policy

  31. BP2 c r3 Full equilibrium is restored at point c IS2 Y3 ISLMBP analysis: floating exchange rates r LM1 LM2 BP1 a r1 r2 b IS1 O Y2 Y1 Y An expansionary monetary policy

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