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10 Cards in this Set
- Front
- Back
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How does the Large Open Economy differ from the Small Open Economy?
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Interest rates (r) are not fixed in the Large Open Economy.
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What are the three equations in the LOE model?
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Y = C(Y-T) + I(r) + G + NX(e)
M/P = L(r, Y) NX(e) = CF(r) |
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What are the two equations for IS-LM in the LOE model and how do you go from three LOE equations to two?
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IS:
Y = C(Y-T) + I(r) + G + CF(r) LM: M/P = L(r, Y) You go from two to three by substituting CF(r) for NX(e) in the first equation. |
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Why do expenditures rely on interest rate (r)?
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1. an increase in interest rate (r) leads to a decrease in investments (I).
2. An increase in interest rates (r) leads to a decrease in net exports (NX). |
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Why is the IS curve flatter for a LOE than a SOE?
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The net capital outflow function flattens the curve. The more responsive the international capital outflows are to the interest rate, the flatter the IS curve.
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How does fiscal policy influence the IS-LM model?
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Fiscal policies shift the IS curve and fiscal policies affect consumption
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"Beggar thy neighbors"
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Raising the money supply because it weakens foreign currencies.
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how does Monetary policy influence the IS-LM model?
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Monetary policy shifts the LM curve because it affects the money supply.
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What does increases monetary base (M) doe?
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Raises output, which raises consumption. It also reduces interest rates, which increases investments.
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How would restricting imports in a LOE affect the economy?
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1. If exchange rates are fixed, NX(e) shifts right.
2. If exchange rates are not fixed, the demand for dollars increases and appreciates the exchange rate. |
