Slides For International Finance

ECON 2301 Principles of Macroeconomics Time: Th 7:05 pm – 9:45 pm Synonym: 40512 Section: 023 Room: NRG2 2120

This example of short run and long run aggregate supply and demand brings us straight into IS-LM Model. The IS-LM Model shows the combinations of both income and interest rates and shows how equilibrium is reached in both the goods and money markets. This model involves two schedules/curves, the IS curve and LM curve. The IS schedule shows the different combinations of income and interest rates at which the goods market is in equilibrium and the LM schedule displays the combinations of interest rates and income compatible with equilibrium in the money market. IS-LM schedule in equilibrium or the goods and money markets in equilibrium.

This model shows the importance of the importance and effect of the aggregate demand on the overall economy. The government through its fiscal policy and the federal bank through its monetary policy try to influence aggregate demand to influence the overall economy. For example, an increase in the nominal money stock, as a result of monetary expansion policy, leads to a higher real money stock at each level of

“The aggregate expenditures line is the summation of consumption expenditures, investment expenditures, government purchases, and net exports. The 45-degree line represents all combinations in which aggregate expenditures equal aggregate output. Keynesian equilibrium is also represented by the saving investment, or injection-leakage, model as the intersection between the injection line (investment expenditures, government purchases, and exports) and the leakage line (saving, taxes, and imports).”(2)

The IS-LM model can help policymakers predict what will happen to aggregate output and interest rates if they decide to increase the money supply or increase government spending. In this way, ISLM analysis will guide towards coming up with an ideal answer to the deficit problem facing the UK's economy. It also highlights the usefulness

According to The World Bank there is a great possibility that developing countries may see a fourth consecutive year of disappointing economic growth in 2015, and may even encounter a fifth negative year in 2016. In the past couple months; developing countries have begun to see the repercussions of low prices for oil and key commodities (The World Bank, 2015). According to World Bank President Jim Yong Kim, "Developing countries were an engine of global growth following the financial crisis, but now they face a more difficult economic environment”(The World Bank, 2015). Despite recent downturns for emerging markets, Chile has been on the up rise since taking a large hit to GDP growth in 2014. In this paper we will analyze the Chilean Economy, its financial systems, exchange rate systems, as well as some of the risk involved in investing in Chilean markets.

Our research is related to studies that analyze the spillovers from U.S. monetary policy on international cash flow. Moore et al. (2013) looks at the effect of U.S. QE on local currency bond markets by using panel model. He found that a drop in the U.S. Treasury bond yield by 10 percentage points leads to a 0.4 percentage point increase in the foreign ownership share of emerging market debt and a significant reduction in government bond yields. Similar studies are made by Chen et al (2011), Neely (2010), and Fratzscher (2013) in which they use event analysis when assessing the impact of U.S. QE on several advanced economies. By analyzing the response of high-frequency financial variables to the Federal Reserve’s announcements of policy changes within a very narrow time frame, they show that U.S. monetary policy shocks significantly affect capital flows and asset price variation in emerging market economies. They also conclude that emerging market economies with stronger fundamentals receive smaller

Orthodox Keynesian economists believe that the change of the money supply will lead to the change of effective demand, and further result in the change of the economy. However, in the monetary economy cycle theories, the expected monetary supply changes will not influence the total economy; the unexpected money supply changes will impact the total economic in short term. In the long term, it merely impacts the changes of general price levels, instead of on the changes of total economy. Therefore, in the issues of controlling inflation, monetary economy cycle theory believes that the governments do not need to have to spend too many costs in the relative output and employment to control the inflation, only if the public trust that the monetary authorities will implement their monetary tightening policies. In addition, new classical macroeconomics further argues that political measures to improve the total output and reduce unemployment have to find ways in the supply part. Therefore, policies work only when they inspire the microeconomic units to provide more products and labors (Grabel, 2000).

Abel, Andrew … (et al.). Macroeconomics (6th Canadian Edition). Upper Saddle River, NJ: Pearson Canada.

The main issue, which has been seen in the emerging economies, is that the growing inflation and the hurdle of the debt crises. Similar situation has also been faced by the European Economies. This is not the first time that these economies are facing this hurdle, because in the previous year also there were some loans taken by the European Central Bank in order to help these economies. However, the payment of these loans was a hurdle for the central bank. This issue has now become more critical due to the emerging technical issue in the European economies (Handl & Paterson, 2013).

Consider an economy in the long run and the effects of fiscal policy. When the government alters its spending, they will directly affect the economy’s performance. Freshwater economists usually don’t buy into the notion of government purchases. When the government increases their purchase by a certain amount, it will increase the demand for goods and services. According to the equation of supply and demand for the economy’s output, disposable income and consumption are unchanged. Total output is constrained by the factors of production. An increase in government spending must be balanced out by other variable. In this scenario, it is investment. It must decrease with an equal amount. Investment decreases because interest rate rises (Mankiw, pg. 69). Most economists would agree that government purchases would lead to a reduction in national saving and hence raising the interest rate.

Demand and supply have been generalized to explain macroeconomic variables in a market economy. The Aggregate Demand-Aggregate Supply model is the most direct application of supply and demand to macroeconomics. Compared to microeconomic uses of demand and supply, different theoretical considerations apply to such macroeconomic counterparts as aggregate demand and aggregate supply. The AD-AS or Aggregate Demand-Aggregate Supply model is a macroeconomic model that explains price level and output through the relationship of aggregate demand and aggregate supply. It is based on the theory of John Maynard Keynes presented in his work “The General Theory of Employment, Interest, and Money”. It is one of the primary simplified

New Classical Macroeconomics arose from the Monetarism and Rational Expectation School in the 1970s and follows the tradition of classical economics. If the market mechanism is allowed to play its role spontaneously, which could solve the unemployment, recession and a series of macroeconomic issues. Keynesian economists believe that changes in the money supply will lead to changes in effective demand that will changes in the total economy. For economic cycle fluctuation, Keynesian economists believe that is a disequilibrium phenomenon. In 1960s, Keynesian economists appealed to the Phillips curve, which means monetary or fiscal policy will lead to lower unemployment rate and cause higher inflation rate as well. However, the new classical rejected the idea, which argued that an expansion of aggregate demand will cause lowered unemployment and economics fluctuation are economics balance under the incomplete information. Unexpected the monetary shock is significant reason for equilibrium change. Luca’s critique take into account the Philips curve should used for evaluate the economics policy. Luca’s critique take for the parameters of measurement model is functions of policy variables, which will follow the policy change to alter.

While J.R. Hicks received the Nobel Prize for many of his accomplishments in both macroeconomic and microeconomic research, his development of what he then called the SI-LL model, but is now more famously known as the IS-LM model, was one of his greatest feats. The IS-LM model was Hicks’ reduction of aggregate demand analysis done by John Maynard Keynes in his book titled The General Theory of Employment, Interest, and Money published in 1936. The model’s purpose was to explain investor decisions dependent on money availability and interest rates in the goods and services market and assets market. The IS-LM model now plays an integral role in both general macroeconomic understanding and policy analysis.

The intermediate target of monetary policy is a core part of the entire operation of monetary policy, the monetary authorities to observe the effect of monetary policy significance. Money supply as monetary policy intermediate variables, their effectiveness has been controversial features of theorists. Whether short-term interest rates through the operation by a central bank is aimed to make a price stability? It will be discussed in this paper. According to the given topic, there are some definitions and questions have to make clear in advance: What is Monetary Policy? How to control the money supply? How to manipulation interest rates? What impact it will take?