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ISLM Analysis of the Open Economy ( ISLMBP Analysis)

ISLM Analysis of the Open Economy ( ISLMBP Analysis). ISLMBP analysis: fixed exchange rates. Fixed exchange rates: The BP curve. ISLMBP analysis: fixed exchange rates. BP. SURPLUS. r 1. DEFICIT. r. O. Y. ISLMBP analysis: fixed exchange rates. SURPLUS. DEFICIT. Y 1. r. BP.

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ISLM Analysis of the Open Economy ( ISLMBP Analysis)

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  1. ISLM Analysis of the Open Economy (ISLMBP Analysis)

  2. ISLMBP analysis: fixed exchange rates Fixed exchange rates: The BP curve

  3. ISLMBP analysis: fixed exchange rates BP SURPLUS r1 DEFICIT r O Y

  4. ISLMBP analysis: fixed exchange rates SURPLUS DEFICIT Y1 r BP O Y

  5. ISLMBP analysis: fixed exchange rates a r1 Y1 r BP O Y

  6. ISLMBP analysis: fixed exchange rates Y1 r Assume that national income rises BP a r1 O Y1 Y

  7. ISLMBP analysis: fixed exchange rates b r Assume that national income rises BP a r1 Deficit if rate of interest remains at r1 O Y1 Y1 Y

  8. ISLMBP analysis: fixed exchange rates c r2 Rate of interest must rise to r2 to restore balance of payments r BP a r1 O Y1 Y1 Y

  9. ISLMBP analysis: fixed exchange rates Full equilibrium in the goods, money and foreign exchange markets

  10. ISLMBP analysis: fixed exchange rates LM BP a r1 IS Y1 r O Y Full equilibrium in the goods, money and foreign exchange markets

  11. ISLMBP analysis: fixed exchange rates Effect of an expansionary fiscal policy under fixed exchange rates

  12. ISLMBP analysis: fixed exchange rates b r2 IS2 Y2 r LM1 BP a r1 IS1 O Y1 Y An expansionary fiscal policy

  13. ISLMBP analysis: fixed exchange rates r LM1 b r2 BP Balance of payments surplus causes money supply to expand a r1 IS2 IS1 O Y1 Y2 Y An expansionary fiscal policy

  14. ISLMBP analysis: fixed exchange rates LM2 c r3 Restoration of full equilibrium Y3 r LM1 b r2 BP a r1 IS2 IS1 O Y1 Y2 Y An expansionary fiscal policy

  15. ISLMBP analysis: fixed exchange rates BP IS2 r LM1 a r1 IS1 O Y1 Y An expansionary fiscal policy: BP curve steeper than LM curve

  16. ISLMBP analysis: fixed exchange rates Y2 r BP LM1 b r2 a r1 IS2 IS1 O Y1 Y An expansionary fiscal policy: BP curve steeper than LM curve

  17. ISLMBP analysis: fixed exchange rates r BP LM1 b r2 Balance of payments deficit causes money supply to contract a r1 IS2 IS1 O Y1 Y2 Y An expansionary fiscal policy: BP curve steeper than LM curve

  18. ISLMBP analysis: fixed exchange rates LM2 c r3 Restoration of full equilibrium Y3 r BP LM1 b r2 a r1 IS2 IS1 O Y1 Y2 Y An expansionary fiscal policy: BP curve steeper than LM curve

  19. ISLMBP analysis: fixed exchange rates Effect of an expansionary monetary policy under fixed exchange rates

  20. ISLMBP analysis: fixed exchange rates r LM1 BP a r1 IS O Y1 Y An expansionary monetary policy

  21. ISLMBP analysis: fixed exchange rates b r2 Y2 r LM1 LM2 BP a r1 IS O Y1 Y An expansionary monetary policy

  22. ISLMBP analysis: fixed exchange rates r LM1 LM2 BP a r1 Balance of payments deficit causes money supply to contract again b r2 IS O Y1 Y2 Y An expansionary monetary policy

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

  24. ISLMBP analysis: fixed exchange rates Floating exchange rates: The BP curve

  25. ISLMBP analysis: floating exchange rates Appreciation BP r SURPLUS O Y

  26. ISLMBP analysis: floating exchange rates Depreciation r BP DEFICIT O Y

  27. ISLMBP analysis: fixed exchange rates Effect of an expansionary fiscal policy under floating exchange rates

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

  29. ISLMBP analysis: floating exchange rates r LM b BP r2 a r1 IS2 IS1 Balance of payments surplus causes the exchange rate to appreciate O Y2 Y1 Y An expansionary fiscal policy

  30. ISLMBP analysis: floating exchange rates The appreciation causes the IS curve to shift to the left r LM b BP r2 a r1 IS2 IS1 O Y2 Y1 Y An expansionary fiscal policy

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

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

  33. ISLMBP analysis: floating exchange rates r BP1 LM b r2 Balance of payments deficit causes exchange rate to depreciate a r1 IS2 IS1 O Y2 Y1 Y An expansionary fiscal policy: BP curve steeper than LM curve

  34. ISLMBP analysis: floating exchange rates Depreciation causes the IS curve to shift to the right r BP1 LM b r2 a r1 IS2 IS1 O Y2 Y1 Y An expansionary fiscal policy: BP curve steeper than LM curve

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

  36. ISLMBP analysis: fixed exchange rates Effect of an expansionary monetary policy under floating exchange rates

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

  38. 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

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

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

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