Open-Economy Macroeconomics Notes

1092 Words Jan 15th, 2012 5 Pages
Ch28 “Open-Economy Macroeconomics”

FOREIGN TRADE AND ECONOMIC ACTIVITY Imports  goods and services produced abroad and consumed domestically Exports  goods and services produced domestically and purchased by foreigners Net exports  defined as exports of goods and services minus imports of goods and services Net foreign investment  counterpart of net exports Denotes net US savings abroad and is approximately equal to the value of net exports  



appreciation in the exchange rate and a corresponding decline in net exports; monetary easing does the opposite. The impact of changes in interest rates on net exports reinforces the impact on domestic investment In a full-employment closed economy (always holding other things
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In an optimal currency area, significant changes in exchange rates are not necessary to ensure rapid macroeconomic adjustment European Monetary Union  one of history’s great economic experiments. Never before has such a large and powerful group of countries turned its economic fortunes over to a multinational body like the European Central Bank. Never before has a central bank been charged with the macroeconomic fortunes of a large group of nations with 325 million people producing $16 trillion of goods and services. While optimists point to the microeconomic benefits of a larger market and lower transactions costs, pessimists worry that monetary union threatens stagnation and unemployment because of the lack of price and wage flexibility and insufficient labor mobility among countries. The financial crisis of 2007-2009 is the first major test of this new monetary system.

Stable macroeconomic climate  taxes are reasonable and predictable and that inflation is low, so lenders need not worry about inflation confiscating their investments  promoting economic growth in an open economy involves ensuring that business is attractive for foreign and domestic investors who have a wide array of investment opportunities in the world economy. The ultimate goals of policy are to have high rates of saving and
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