【正文】 1 Contents ?DD Schedule ?AA Schedule ?Temporary Changes in Policies ?Permanent Changes in Policies ?Macroeconomic Policy amp。 the Current Account ?Assignments 2 ?DD Schedule I. Aggregate Demands in an Open Economy Consumption Demand C=C(Yd) Where, Yd stands for disposable ine(Yd=YT), which equals national ine less taxes. Current Account Determinants CA=CA(SP*/P, Yd) Where, SP*/P denotes real exchange rate. ?Determinants of current account (Table 311) 3 ?DD Schedule C h a n g e E f f e c t o n c u r r e n t a c c o u n t R e a l e x c h a n g e r a t e ( S P */ P ) ↑ CA ↑ R e a l e x c h a n g e r a t e ( S P */ P ) ↓ CA ↓ D i s pos a bl e i n c om e ( Y d ) ↑ CA ↓ D i s pos a bl e i n c om e ( Y d ) ↓ CA ↑ Table 311 Determinants of the Current Account Aggregate Demand Consumption, investment, government purchase and export constitute a country’s aggregate demand in an open economy. By adding up all the ponents, we get a simple expression for aggregate demand, denoted by AD. AD=C(YT)+I+G+CA(SP*/P, YT) 4 ?DD Schedule ?RER and aggregate demand Conclusion: All else equal, a real depreciation of the home currency raises aggregate demand for home output. Also other things equal, a real appreciation lowers aggregate demand for home output. ?Real ine amp。 aggregate demand Channel 1: An increase (a fall) in real ine will raise (lower) consumption and hence aggregate demand. Channel 2: An increase (a fall) in real ine will raise (lower) import, and lower (raise) current account and aggregate demand. 5 Figure 311 Aggregate Demand as A Function of Output AD Y AD=AD(SP*/P, YT, I, G) 45o 6 ?DD Schedule II. Output Determination in the Short Run Output market is in equilibrium when real output equals aggregate demand for domestic output (see Figure 312 on the next page), namely, AD=Y Attention: “Our analysis of real output determination applies to the short run because we assume that the money prices of goods and services are temporarily fixed.” (Krugman and Obstfeld, 2020, 438). 7 Figure 312 Output Determination AD Y AD 2 1 3 Y2 Y1 Y3 45o AD=Y 8 ?DD Schedule III. Output Market Equilibrium: The DD Curve In this section, we will see the relationship between the exchange rate and the output when goods market is in equilibrium. Output, Exchange Rate amp。 Goods Market Equilibrium Conclusion: Any rise (fall) in the real exchange rate SP*/P (whether due to a rise in S, a rise in P*, or a fall in P) will cause an upward (downward) shift in the aggregate demand function and an expansion (contraction) of output, all else equal. See Figure 313. 9 Figure 313 Output Effect of a Currency Depreciation with Fixed Prices AD Y Y1 Y2 45o AD=Y AD1 AD2 depreciation 10 ?DD Schedule Derivation of the DD Schedule “If we assume P and P* are fixed in the short run, a depreciation of the domestic currency (a rise in S) is associated with a rise in Y. This association provides us with one of the two relationships between S and Y needed to describe the shortrun macroeconomic behavior of an open economy. We summarize this relationship by the DD schedule, which shows all binations of output and the exchange rate for which the output market is in shortrun equilibrium(aggregate demand=aggregate output)” (Krugman and Obstfeld, 2020, 441442). See Figure 314 for the derivation of the schedule. 11 Figure 314 Output Effect of a Currency Depreciation with Fixed Prices AD Y AD1(S1) Y Y1 Y2 S S1 S2 Y1 Y2 DD AD2(S2) 12 ?DD Schedule Factors Shifting the DD Schedule ?Changes in G: See Figure 315. ?Changes in T ?Changes in I ?Changes in P ?Changes in P* ?Changes in consumption function ?Demand shifts between domestic amp。 foreign goods Conclusion: Any disturbance that raises (lowers) home aggregate demand for domestic output shifts the DD curve to the right (left). 13 Figure 315 Government Demand and the Position of the DD Curve AD Y Y Y1 Y2 S S1 Y1 Y2 DD1 AD2(S1,G2) AD1(S1,G1) DD2 14 ?AA Schedule I. AA Schedule Since any point on the DD curve cannot determine the equilibrium output and the exchange rate, we have to find another relationship describing the relationship between the output and the exchange rate to plete the story of shortrun equilibrium. The schedule of the exchange rate and the output binations that are consistent with equilibrium in the domestic money market and the foreign exchange market is called the AA schedule. Output, Exchange Rate amp。 Asset Market Equilibrium Asset market include home money market, home bond market, and the exchange market. See Figure 316. 15 Figure 316 Output amp。 Exchange Rate in Asset Market Equilibrium i1 return 0 S1 M/P Expected return on foreign deposits Real money supply i2 S2 A rise in Y 16 ?AA Schedule Deriving the AA Schedule See Figure 317 and Figure 318. Factors Shifting the AA Schedule ?Changes in Ms:See Figure 318. ?Changes in P ?Changes in Se ?Changes in i* ?Changes in Real Money Demand 17 Figure 317 AA Schedule S Y Y1 Y2 S1 S2 AA 18 Figure 318 Ms Changes and the AA Schedule i1 S1 M/P i2 rise in Y S2 Y Y1 Y2 S1 S2 M3/P S3 19 ?AA Schedule II. Shortrun Equilibrium in an Open Economy Since we assume price is held fixed in the short run, the equilibrium output and the exchange rate are determined by the the cross of the DD and AA schedules simultaneously. Note also, the price is exogenously determined here, the open economy has four markets, namely, goods market, money market, f