Review of the previous lecture • Nominal interest rate. equals real interest rate + inflation rate Fisher effect: nominal interest rate moves one-for-one w/ expected. inflation is the opp. cost of holding money • Money demand. depends on income in the Quantity Theory. more generally, it also depends on the nominal interest rate;. if so, then changes in expected inflation. affect the current price level . Review of the previous lecture • Costs of inflation. Expected inflation. shoeleather costs, menu costs,. tax & relative price distortions,. inconvenience of correcting figures for inflation Unexpected inflation. all of the above plus arbitrary redistributions of wealth between. debtors and creditors Review of the previous lecture • Hyperinflation. caused by rapid money supply growth when money printed to finance govt budget deficits. stopping it requires fiscal reforms to eliminate govt’s need for printing. money Lecture 12 Open economy - I .Instructor: Abbas Lecture Outline 1. Open economy 2. Saving and investment 3. Three experiment Open economy.•spending need not equal output •saving need not equal investment Preliminaries. C =Cd +Cf superscripts:. d = spending on . I =I d. +I f. domestic goods. f = spending on . G =Gd +Gf foreign goods •EX = exports = foreign spending on domestic goods •IM = imports = C f + I f + G f = spending on foreign goods •NX = net exports (. the “trade balance”) = EX – IM Open = expenditure on domestically produced g & s Y =Cd + I d. + G d + EX = ( C − C f ) + ( I − I f ) + ( G − G f ) + EX = C + I + G + EX − ( C f + I f + G f ) = C + I + G + EX − I M = C + I + G + NX Open national income identity in an open economy . Y = C + I + G + NX . or, NX = Y – (C + I + G ) net exports domestic . spending output Open surpluses and deficits . NX = EX – IM = Y – (C + I + G ) .trade surplus •output > spending and exports > imports •Size of the trade surplus = NX trade deficit •spending > output and imports > exports •Size of the trade deficit = –NX Open economy International capital flows •Net capital outflows. =S – I =net outflow of “loanable funds” =net purchases of foreign assets. the country’s purchases of foreign assets. minus foreign purchases of domestic assets .•When S > I, country is a net lender •When S |
