Chapter 22

How Does the Open Macroeconomy Work?

How Does the Open Macroeconomy Work? This chapter provides a framework and model for analyzing international macroeconomics. We judge the performance of a national economy against two objectives. Internal balance involves both full employment and price stability or an acceptable rate of inflation. External balance involves a reasonable and sustainable makeup of the country's international payments, taken to be approximately an official settlements balance that is zero.

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知识点7

案例4

习题60

Knowledge Points

知识点

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The Performance of a National Economy

This chapter provides a framework and model for analyzing international macroeconomics. We judge the performance of a national economy against two objectives. Internal balance involves both full employment and price stability or an acceptable rate of inflation. External balance involves a reasonable and sustainable makeup of the country's international payments, taken to be approximately an official settlements balance that is zero.

Internal Balance
Actual domestic production close to the economy’s potential, often summarized as full employment (an acceptably low unemployment rate)
Price stability (an acceptably low inflation rate)

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Domestic Production Depends on Aggregate Demand

In the short run (and within the economy's supply capabilities), domestic production is determined by aggregate demand: Y = AD = C + Id + G + (X - M) = E + (X - M), where Y is both domestic production and national income, and E is national expenditure on goods and services. Consumption C is a positive function of Y (inclusive of the effects of taxes T), and real domestic investment Id is a negative function of the interest rate i.

In the short run, domestic production (producers’ willingness to produce) is determined by demand.
Equilibrium occurs when domestic production (Y, or real GDP) equals desired aggregate demand (AD) for domestically produced goods and services:
Y = AD = C + I

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Equilibrium GDP and Spending Multipliers

In the short run, domestic production (producers’ willingness to produce) is determined by demand.
Equilibrium occurs when domestic production (Y, or real GDP) equals desired aggregate demand (AD) for domestically produced goods and services:
Y = AD = C + I

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Trade Depends on Income

Consumption expenditure depends on domestic income (Y):
C = C (Y)
Real private domestic investment is negatively related to the level of interest rates, i, in the economy:

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A More Complete Framework: Three Markets

The IS-LM-FE model provides a more complete framework for analyzing the open macroeconomy. It shows the determination of the short-run equilibrium levels of the country's real GDP and interest rate while also indicating the state of the country's official settlements balance (or, equivalently, the pressure on the exchange rate value of the country's currency).

Three types of markets:
Domestic product market
Money market

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A Framework for Macroeconomic Analysis

Our model analyzes the economy in the short run, when prices are “sticky” and slow to respond to various demand shocks, such as changes in the money supply.
Beyond the short run, the price level does respond to demand and supply shocks. This means that the amount of inflation the country experiences eventually depends on the rate of growth of the country’s money supply.
In addition, the economy tends toward full employment in the long run.

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Domestic Production and Unemployment

5.The intersection of the IS and LM curves indicates a short-run equilibrium in the country’s market for goods and services (the IS curve) and a short-run equilibrium in the country’s market for money (the LM curve). The intersection indicates the equilibrium level of the country’s real domestic product and income (its real GDP) and the equilibrium level of its interest rate.

Internal Balance
Actual domestic production close to the economy’s potential, often summarized as full employment (an acceptably low unemployment rate)
Price stability (an acceptably low inflation rate)

Cases

案例与情境

2.Disagree. The recession in the United States reduces U.S. national inc ...

2.Disagree. The recession in the United States reduces U.S. national income, so U.S. residents reduce spending on all kinds of things, including spending on imports. The decrease in U.S. imports is a decrease in the exports of other countries, including Europe’s exports to the United States. The reduction in European exports reduces production in Europe, so the growth of real GDP in Europe declines.

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11.The real exchange rate value of the dollar increased from 90 ...

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11.The real exchange rate value of the dollar increased from 90 to 100, so the U.S. dollar had a real appreciation. The United States lost international price competitiveness. (For the import and export functions shown in equations 22.13 and 22.14, the ratio (Pf e/P) is an indicator of the U.S. international price competitiveness. Stated this way, the real exchange rate is measuring the real exchange-rate value of the foreign (rest of the world) currency—the nominal exchange rate e is valuing foreign currency and the foreign currency product price index Pf is in the numerator. The rest of the world experienced a real depreciation (from 111 to 100), so the rest of the world gained international price competitiveness.) A change in international price competitiveness drives a change in the country’s net exports and current account, so the IS and FE curves shift. A decline in international p

We have chosen to focus more on the complete model, and ...

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We have chosen to focus more on the complete model, and to reduce the treatment of spending multipliers by presenting the explicit formula for only the small, open-economy multiplier. Foreign income repercussions are covered intuitively and with examples. An instructor who wants to cover more on multipliers may want to prepare a class handout of a few pages that works through multipliers with foreign income repercussions. Suggested answers to end of chapter questions and problems 1.Mexico. The United States and Mexico have close trading ties, with most of Mexico’s exports destined for the United States. If national production and income increase in the United States, the relatively large increase in Mexican exports to the United States increases Mexico’s domestic product by a substantial amount. For countries other than Mexico and Canada, the shares of their exports that go to the United

The final piece of the framework that we develop in the ...

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The final piece of the framework that we develop in the text is that the country's exports and imports depend on international price competitiveness, in addition to depending on national incomes. The price of foreign-produced traded products relative to the price of home-produced substitute products is Pf e/P, where e is measured as units of domestic currency per unit of foreign currency. This ratio is essentially the (inverse of the country’s) real exchange rate introduced in Chapter 19. The country's demand for imports is a negative function of this price ratio, while demand for the country's exports is a positive function. A change in price competitiveness causes a change in net exports, so that both the IS and the FE curves shift. Tips

Exercises

习题与答案

题目 1The Performance of a National Economy

Which of the following is NOT a fundamental objective for the performance of a country's macroeconomy?

A) Price stability
B) Interest rates
C) Full employment of resources
D) A reasonable and sustainable balance of payments with the rest of the world

正确答案：B | Interest rates

难度：1 Easy Bloom's：Remember

题目 2The Performance of a National Economy

The goal of internal balance includes

A) low interest rates.
B) full employment of resources.
C) a reasonable and sustainable balance of payments with the rest of the world.
D) exchange rate stability.

正确答案：B | full employment of resources.

难度：1 Easy Bloom's：Remember

题目 3Domestic Production Depends on Aggregate Demand

If C represents aggregate consumption, Id represents domestic investments, G represents government expenditures, E represents national expenditures on goods and services, X represents foreign demands for exports, and M represents domestic demand for imports, then aggregate demand for this country equals

A) C + Id + G.
B) E + C + Id + (X – M).
C) C + Id + G + (X – M).
D) E + (M – X).

正确答案：C | C + Id + G + (X – M).

难度：2 Medium Bloom's：Understand

题目 4Equilibrium GDP and Spending Multipliers

Equilibrium gross domestic product (GDP) in the short run is determined at the point where

A) gross domestic production equals aggregate demand.
B) domestic production equals domestic consumption.
C) imports equal exports.
D) the rate of unemployment equals zero.

正确答案：A | gross domestic production equals aggregate demand.

难度：1 Easy Bloom's：Remember

题目 5Equilibrium GDP and Spending Multipliers

Real domestic investment spending is

A) positively related to the marginal propensity to consume.
B) negatively related to the level of interest rates in the economy.
C) positively related to government spending.
D) negatively related to the exchange rate.

正确答案：B | negatively related to the level of interest rates in the economy.

难度：1 Easy Bloom's：Remember

题目 6Trade Depends on Income

The amount by which imports increase when income goes up by one dollar is called

A) the marginal propensity to consume.
B) the spending multiplier.
C) the money multiplier.
D) the marginal propensity to import.

正确答案：D | the marginal propensity to import.

难度：1 Easy Bloom's：Remember

题目 7Trade Depends on Income

If the marginal propensity to save is 0.3 and the marginal propensity to import is 0.2, then value of the simple spending multiplier is

A) 2.0.
B) 0.5.
C) 1.5.
D) 0.1.

正确答案：A | 2.0.

难度：2 Medium Bloom's：Understand

题目 8Trade Depends on Income

The greater the marginal propensity to import, the

A) smaller the spending multiplier.
B) greater the level of investment.
C) greater is the net export.
D) smaller is the level of consumption.

正确答案：A | smaller the spending multiplier.

难度：1 Easy Bloom's：Remember

题目 9Trade Depends on Income

For a small open economy, assume that the marginal propensity to import is 0.3, and that interest rates, exchange rates, and the price level are all constant. If an increase of $10 billion in government spending results in an increase of $6 billion in imports, then

A) real gross domestic product (GDP) increases by $4 billion.
B) the spending multiplier is 2.
C) taxes increase by $10 billion.
D) real domestic investment decreases by $4 billion.

正确答案：B | the spending multiplier is 2.

难度：3 Hard Bloom's：Apply

题目 10Domestic Production Depends on Aggregate Demand

Fiscal policy consists of

A) changes in money supply and interest rates.
B) changes in government expenditures and taxes.
C) changes in exchange rate par values.
D) changes in the official settlements balance.

正确答案：B | changes in government expenditures and taxes.

难度：1 Easy Bloom's：Remember

题目 11Trade Depends on Income

If the marginal propensity to save is 0.3, the marginal propensity to import is 0.1, and the government increases expenditures by $10 billion, ignoring foreign-income repercussions, how much will gross domestic product (GDP) rise?

A) $20 billion.
B) $10 billion.
C) $25 billion.
D) $15 billion.

正确答案：C | $25 billion.

难度：3 Hard Bloom's：Apply

题目 12Equilibrium GDP and Spending Multipliers

When considering foreign-income repercussions, the spending multiplier is

A) smaller because an increase in domestic imports causes a current account deficit.
B) larger because an increase in domestic imports causes foreign income to rise and thus boosts domestic exports.
C) smaller because an increase in domestic imports lowers the growth in domestic exports.
D) larger because an increase in domestic imports causes a surplus in the official settlements balance.

正确答案：B | larger because an increase in domestic imports causes foreign income to rise and thus boosts domestic exports.

难度：2 Medium Bloom's：Understand