Review of the previous lecture Exchange rates nominal: the price of a countrys currency in terms of...
-
Upload
easter-stewart -
Category
Documents
-
view
219 -
download
0
description
Transcript of Review of the previous lecture Exchange rates nominal: the price of a countrys currency in terms of...
![Page 1: Review of the previous lecture Exchange rates nominal: the price of a countrys currency in terms of another countrys currency real: the price of a countrys.](https://reader036.fdocuments.in/reader036/viewer/2022062413/5a4d1b7d7f8b9ab0599b9eee/html5/thumbnails/1.jpg)
Review of the previous lecture
• Exchange rates nominal: the price of a country’s currency in terms of another country’s
currency
real: the price of a country’s goods in terms of another country’s goods.
The real exchange rate equals the nominal rate times the ratio of prices of the two countries.
• How the real exchange rate is determined NX depends negatively on the real exchange rate, other things equal
The real exchange rate adjusts to equate
NX with net capital outflow
![Page 2: Review of the previous lecture Exchange rates nominal: the price of a countrys currency in terms of another countrys currency real: the price of a countrys.](https://reader036.fdocuments.in/reader036/viewer/2022062413/5a4d1b7d7f8b9ab0599b9eee/html5/thumbnails/2.jpg)
• How the nominal exchange rate is determined
e equals the real exchange rate times the country’s price level relative to the foreign price level.
For a given value of the real exchange rate, the percentage change in the nominal exchange rate equals the difference between the foreign & domestic inflation rates.
Review of the previous lecture
![Page 3: Review of the previous lecture Exchange rates nominal: the price of a countrys currency in terms of another countrys currency real: the price of a countrys.](https://reader036.fdocuments.in/reader036/viewer/2022062413/5a4d1b7d7f8b9ab0599b9eee/html5/thumbnails/3.jpg)
Aggregate Demand and Aggregate Supply - IInstructor: Prof.Dr.Qaisar Abbas
Course code: ECO 400
Lecture 23
![Page 4: Review of the previous lecture Exchange rates nominal: the price of a countrys currency in terms of another countrys currency real: the price of a countrys.](https://reader036.fdocuments.in/reader036/viewer/2022062413/5a4d1b7d7f8b9ab0599b9eee/html5/thumbnails/4.jpg)
Lecture Outline
1. Short run economic fluctuations
2. The Basic Model of Economic Fluctuations
3. The Aggregate-Demand Curve
![Page 5: Review of the previous lecture Exchange rates nominal: the price of a countrys currency in terms of another countrys currency real: the price of a countrys.](https://reader036.fdocuments.in/reader036/viewer/2022062413/5a4d1b7d7f8b9ab0599b9eee/html5/thumbnails/5.jpg)
Short-Run Economic Fluctuations
• Economic activity fluctuates from year to year.
– In most years production of goods and services rises.
– On average over the past 50 years, production in the U.S. economy has grown by about 3 percent per year.
– In some years normal growth does not occur, causing a recession.
– A recession is a period of declining real incomes, and rising unemployment.
– A depression is a severe recession.
![Page 6: Review of the previous lecture Exchange rates nominal: the price of a countrys currency in terms of another countrys currency real: the price of a countrys.](https://reader036.fdocuments.in/reader036/viewer/2022062413/5a4d1b7d7f8b9ab0599b9eee/html5/thumbnails/6.jpg)
Three Key Facts About Economic Fluctuations
• Economic fluctuations are irregular and unpredictable.– Fluctuations in the economy are often called the business cycle.
• Most macroeconomic variables fluctuate together.• As output falls, unemployment rises.
![Page 7: Review of the previous lecture Exchange rates nominal: the price of a countrys currency in terms of another countrys currency real: the price of a countrys.](https://reader036.fdocuments.in/reader036/viewer/2022062413/5a4d1b7d7f8b9ab0599b9eee/html5/thumbnails/7.jpg)
Economic FluctuationsShort-Run Economic Fluctuations
![Page 8: Review of the previous lecture Exchange rates nominal: the price of a countrys currency in terms of another countrys currency real: the price of a countrys.](https://reader036.fdocuments.in/reader036/viewer/2022062413/5a4d1b7d7f8b9ab0599b9eee/html5/thumbnails/8.jpg)
Three Key Facts About Economic Fluctuations
• Most macroeconomic variables fluctuate together.
– Most macroeconomic variables that measure some type of income or production fluctuate closely together.
– Although many macroeconomic variables fluctuate together, they fluctuate by different amounts.
![Page 9: Review of the previous lecture Exchange rates nominal: the price of a countrys currency in terms of another countrys currency real: the price of a countrys.](https://reader036.fdocuments.in/reader036/viewer/2022062413/5a4d1b7d7f8b9ab0599b9eee/html5/thumbnails/9.jpg)
Economic Fluctuations
Short-Run Economic Fluctuations
![Page 10: Review of the previous lecture Exchange rates nominal: the price of a countrys currency in terms of another countrys currency real: the price of a countrys.](https://reader036.fdocuments.in/reader036/viewer/2022062413/5a4d1b7d7f8b9ab0599b9eee/html5/thumbnails/10.jpg)
Three Key Facts About Economic Fluctuations
• As output falls, unemployment rises.
– Changes in real GDP are inversely related to changes in the unemployment rate.
– During times of recession, unemployment rises substantially.
![Page 11: Review of the previous lecture Exchange rates nominal: the price of a countrys currency in terms of another countrys currency real: the price of a countrys.](https://reader036.fdocuments.in/reader036/viewer/2022062413/5a4d1b7d7f8b9ab0599b9eee/html5/thumbnails/11.jpg)
Economic FluctuationsShort-Run Economic Fluctuations
![Page 12: Review of the previous lecture Exchange rates nominal: the price of a countrys currency in terms of another countrys currency real: the price of a countrys.](https://reader036.fdocuments.in/reader036/viewer/2022062413/5a4d1b7d7f8b9ab0599b9eee/html5/thumbnails/12.jpg)
Explaining Short-run Economic Fluctuations
• How the Short Run Differs from the Long Run
– Most economists believe that classical theory describes the world in the long run but not in the short run.
• Changes in the money supply affect nominal variables but not real variables in the long run.
• The assumption of monetary neutrality is not appropriate when studying year-to-year changes in the economy.
• Two variables are used to develop a model to analyze the short-run fluctuations.
– The economy’s output of goods and services measured by real GDP.
– The overall price level measured by the CPI or the GDP deflator.
![Page 13: Review of the previous lecture Exchange rates nominal: the price of a countrys currency in terms of another countrys currency real: the price of a countrys.](https://reader036.fdocuments.in/reader036/viewer/2022062413/5a4d1b7d7f8b9ab0599b9eee/html5/thumbnails/13.jpg)
The Basic Model of Economic Fluctuations
• The Basic Model of Aggregate Demand and Aggregate Supply
– Economist use the model of aggregate demand and aggregate supply to explain short-run fluctuations in economic activity around its long-run trend.
– The aggregate-demand curve shows the quantity of goods and services that households, firms, and the government want to buy at each price level.
– The aggregate-supply curve shows the quantity of goods and services that firms choose to produce and sell at each price level.
![Page 14: Review of the previous lecture Exchange rates nominal: the price of a countrys currency in terms of another countrys currency real: the price of a countrys.](https://reader036.fdocuments.in/reader036/viewer/2022062413/5a4d1b7d7f8b9ab0599b9eee/html5/thumbnails/14.jpg)
The Basic Model of Aggregate Demand and Aggregate Supply
Aggregate Demand and Aggregate Supply
![Page 15: Review of the previous lecture Exchange rates nominal: the price of a countrys currency in terms of another countrys currency real: the price of a countrys.](https://reader036.fdocuments.in/reader036/viewer/2022062413/5a4d1b7d7f8b9ab0599b9eee/html5/thumbnails/15.jpg)
The Aggregate-demand Curve
• The four components of GDP (Y) contribute to the aggregate demand for goods and services.
Y = C + I + G + NX
![Page 16: Review of the previous lecture Exchange rates nominal: the price of a countrys currency in terms of another countrys currency real: the price of a countrys.](https://reader036.fdocuments.in/reader036/viewer/2022062413/5a4d1b7d7f8b9ab0599b9eee/html5/thumbnails/16.jpg)
Aggregate-DemandThe Aggregate-Demand Curve
![Page 17: Review of the previous lecture Exchange rates nominal: the price of a countrys currency in terms of another countrys currency real: the price of a countrys.](https://reader036.fdocuments.in/reader036/viewer/2022062413/5a4d1b7d7f8b9ab0599b9eee/html5/thumbnails/17.jpg)
Why the Aggregate-Demand Curve Is Downward Sloping
• The Price Level and Consumption: The Wealth Effect
• The Price Level and Investment: The Interest Rate Effect
• The Price Level and Net Exports: The Exchange-Rate Effect
The Price Level and Consumption: The Wealth Effect– A decrease in the price level makes consumers feel more wealthy,
which in turn encourages them to spend more. – This increase in consumer spending means larger quantities of goods
and services demanded.
![Page 18: Review of the previous lecture Exchange rates nominal: the price of a countrys currency in terms of another countrys currency real: the price of a countrys.](https://reader036.fdocuments.in/reader036/viewer/2022062413/5a4d1b7d7f8b9ab0599b9eee/html5/thumbnails/18.jpg)
Why the Aggregate-Demand Curve Is Downward Sloping
• The Price Level and Investment: The Interest Rate Effect– A lower price level reduces the interest rate, which encourages greater
spending on investment goods.– This increase in investment spending means a larger quantity of goods
and services demanded.
• The Price Level and Net Exports: The Exchange-Rate Effect– When a fall in the U.S. price level causes U.S. interest rates to fall, the
real exchange rate depreciates, which stimulates U.S. net exports.– The increase in net export spending means a larger quantity of goods
and services demanded.
![Page 19: Review of the previous lecture Exchange rates nominal: the price of a countrys currency in terms of another countrys currency real: the price of a countrys.](https://reader036.fdocuments.in/reader036/viewer/2022062413/5a4d1b7d7f8b9ab0599b9eee/html5/thumbnails/19.jpg)
Why the Aggregate-Demand Curve Might Shift
• The downward slope of the aggregate demand curve shows that a fall in the price level raises the overall quantity of goods and services demanded.
• Many other factors, however, affect the quantity of goods and services demanded at any given price level.
• When one of these other factors changes, the aggregate demand curve shifts.
• Shifts arising from – Consumption– Investment– Government Purchases– Net Exports
![Page 20: Review of the previous lecture Exchange rates nominal: the price of a countrys currency in terms of another countrys currency real: the price of a countrys.](https://reader036.fdocuments.in/reader036/viewer/2022062413/5a4d1b7d7f8b9ab0599b9eee/html5/thumbnails/20.jpg)
Shifts in the Aggregate Demand Curve
Quantity ofOutput
PriceLevel
0
Aggregatedemand, D1
P1
Y1
D2
Y2
![Page 21: Review of the previous lecture Exchange rates nominal: the price of a countrys currency in terms of another countrys currency real: the price of a countrys.](https://reader036.fdocuments.in/reader036/viewer/2022062413/5a4d1b7d7f8b9ab0599b9eee/html5/thumbnails/21.jpg)
Summary
• All societies experience short-run economic fluctuations around long-run trends.
• These fluctuations are irregular and largely unpredictable.
• When recessions occur, real GDP and other measures of income, spending, and production fall, and unemployment rises.
![Page 22: Review of the previous lecture Exchange rates nominal: the price of a countrys currency in terms of another countrys currency real: the price of a countrys.](https://reader036.fdocuments.in/reader036/viewer/2022062413/5a4d1b7d7f8b9ab0599b9eee/html5/thumbnails/22.jpg)
Summary
• Economists analyze short-run economic fluctuations using the aggregate demand and aggregate supply model.
• According to the model of aggregate demand and aggregate supply, the output of goods and services and the overall level of prices adjust to balance aggregate demand and aggregate supply.
![Page 23: Review of the previous lecture Exchange rates nominal: the price of a countrys currency in terms of another countrys currency real: the price of a countrys.](https://reader036.fdocuments.in/reader036/viewer/2022062413/5a4d1b7d7f8b9ab0599b9eee/html5/thumbnails/23.jpg)
Summary
• The aggregate-demand curve slopes downward for three reasons: a wealth effect, an interest rate effect, and an exchange rate effect.
• Any event or policy that changes consumption, investment, government purchases, or net exports at a given price level will shift the aggregate-demand curve.