Book: Goods Market In An Open Evonomy Flashcards
Does output inly depend on domestic demand
No also foreign demand in an open economy
What equation gives the demand in an open economy
Z=C+I+G - IM/e +X
What is domestic demand
C+I+G
What determines imports
output and real exchange rate
IM=f(Y,e)
+ +
What determines exports
Foreign income and the exchange rate
X=f(Y*,e)
+ -
When is there trade balance
At the level of output when X=IM/e as both export and imports depend on output
What effect foes increased government spending have in an open economy
A lesser effect than in a closed as imports increase which increases the trade deficit
How does foreign demand affect domestic output and trade balance
It improves both as increased exports also improves output but not to such an extent that the trade balance diminishes
Why is policy coordination nececary
Because it will increase the multiplayer for demand and lessen the harm to the trade balance but it is hard because nations are in different situations
How does depreciating the real exchange rate affect the trade balance
It increases exports, decreases the export volume but makes the stuff more expensive
What is the Marshall Lerner condition
That for the trade balance to improve during a depreciation of the currency the exports must increase and imports must decrease enough to make up for the relative increase in import prices
How can a government improve trade balance without harming output
By depreciating the currency and reducing government spending just right so that the currency lessens improving trade balance but output stays the same so that the extra demand don’t go out agin
When is there equilibrium in an open goods matket
CA=S+T-G-I
When current account corresponds with public and private savings minus investment. A positive CA means that a country saves more than it invests
