OutputandtheExchangeRateintheShortRun课件.ppt

Permanent ↑ in Ms: Overshooting? 16-* Y E DD1 Yf AA1 AA2 AA3 DD2 Y E DD1 Yf AA1 AA2 AA3 DD2 Y E DD1 Yf AA1 AA2 AA3 DD2 AA1 is the initial AA curveAA2 is AA1 plus effect of Ee↑ caused by permanent ↑ in Ms.AA3 is AA2 plus effect of Ms/P↑ caused by permanent ↑ in Ms.In the long run, Ms/P returns to original level. So, the economy goes from a green dot to a black dot in the short run, and to the higher of the two green dots in the long run. Overshooting Undershooting Neither over nor under! Macroeconomic Policies and the Current Account By recalling the effects of various policies on the real dollar/euro exchange rate (q = EP*/P) and on disposable income (Yd = Y ? T), we can figure out their effects on the current account (CA). 16-* * When this is combined with the full-employment condition Y = Yf, we get a long-run theory of q, the real exchange rate. * Recap: What makes (E), the value of the foreign currency, change? 16-* E R R* Ee (-) (+) (+) M/P Y Domestic preference for cash (-) (+) (+) M*/P* Y* Foreign preference for cash (-) (+) (+) Note the inverse relation between Y and E. This yields another curve linking Y and E: the AA curve. But E is also affected by changes in M/P, Ee, and L, the preference for cash. Shifting the AA Curve The AA curve shifts right if: Ms increases P decreases Ee rises R* rises L decreases for some unknown reason 16-* Y E E0 Y0 Y1 E1 SHORT-RUN MACROECONOMIC EQUILIBRIUM Putting the Pieces Together: the DD and AA Curves A short run equilibrium means that the exchange rate (E) and output (Y) are such that there is equilibrium in: the output market: aggregate demand (D) equals aggregate output (Y). the foreign exchange market: interest parity holds. the money market: real money supply (MS/P) equals real money demand (L). 16-* Y = D(E×P*/P, Y – T, I, G) Fig. 17-8: Short-Run Equilibrium: The Intersection of DD and AA 17-* The output market is in equilibrium on the DD curve The asset markets are in equilibrium on the AA curve The short run e