chuong 4

LOGO

TÀI CHÍNH QUỐC TẾ

Chapter 4:
OPEN ECONOMY
MACROECONOMICS
GVHD: GS. Trần Ngọc Thơ
NHÓM 02: 1-Nguyễn Văn Tài
2-Âu Thùy Linh
3-Hà Văn Bảo


OPEN ECONOMY MACROECONOMICS

IS–LM model of aggregate demand
Supply of money in an open economy
Aggregate supply
Conclusions
Teacher's comments


OPEN ECONOMY MACROECONOMICS

IS–LM model of aggregate demand


IS curve
National income: y = C + I + G + B

(4.1)

y is (real) national income
C is expenditure on consumption
I is expenditure on investment
G is net government purchases
B is the surplus on the current account of the
balance of payments:
B ≡ exports − imports
(4.2)


IS curve
If we subtract C, I and B from both sides of Equation 4.1:
y–C–I–B=G
 Savings (S) = y – C
Savings − I − B = G

(4.3)

Savings definition: income less consumption


IS curve
Savings:

Savings (S) = y – C

 Income:
 The individual household: the higher its income, the
more it will save (other things being equal).

 Aggregating households: saving is likely to depend
positively on the (planned) level of economic activity.
 Interest rates:
 rS
 rS
At a zero interest rate, one might expect saving
to drop to zero.


IS curve
Investment spending:

I

 rI
 rI
 rI&S
 rI&S
Concluded:

With S < I
 rI+S
 rI+S


IS curve
Government spending:

G

Government spending will be taken as exogenously
The current account of the balance of payments: B
The real exchange rate: Q =
At higher levels of Q, the current account surplus is
likely to be greater (or the deficit smaller) than at low
levels.


IS curve

/>

IS curve


IS curve
IS curve: by + zr − hQ = G0


IS curve
• Point A (r0, y0):  equilibrium in the product market
Saving net of investment just sufficient to finance the given
deficits in the public and external trade sectors of the economy
by0 + zr0 = Go + hQo
• Point C (r1, y0): r1 < r0 the volume of saving will be smaller
and the volume of investment spending greater than at A. Net
saving must be inadequate at the point C
• Point B (r1, y1) : a flow of savings sufficient to offset the
otherwise reduced level of net saving associated with the lower
interest rate

by1 + z r1 = Go + hQo
The IS curve, will be downward sloping, always associating lower
levels of the interest rate with higher levels of y


IS curve
IS curve will shift to the right if increases net government
spending, G, or an improvement in UK competitiveness
(increase in Q).

Summarize conclusions about the open economy IS curve.
 The IS curve is a downward sloping line joining all
combinations of the interest rate and the level of
income.
 Any increase in either G or Q or both will shift the IS
curve outwards.


IS–LM model of aggregate demand
Money market
Money refers to the asset or assets that are commonly used
as a means of payment.


IS–LM model of aggregate demand
Demand for money
Universal
acceptability

Portability

Storability

 Money is the most liquid of all assets
The opportunity cost of holding money is the return that
could have been earned by holding a asset less liquid than
money.
The choice as to how much money to hold involves a tradeoff between the benefit in terms of transactions
convenience and the opportunity cost.


IS–LM model of aggregate demand
Theroy: The demand for money will be greater the larger
the volume of transactions and will be smaller the higher
the return on non-money assets.
Md = kY ; k > 0
 Md is the demand for money (nominal term)
 Y is national income (nominal term)
 k is a positive parameter
Y ≡ Py
 Y is definition the product of real income
 y is times
 P is the price level
 The Cambridge quantity equation: Md = kPy


IS–LM model of aggregate demand
The Cambridge quantity equation: Md = kPy
By dividing both sides of equation by P:
- The left-hand side is the demand for real money

balances
- The right-hand side is the constant k times the real
income generated in the economy
Each increase in the money supply generates an
equiproportionate rise in the price index.
Milton Friedman’s famous assertion: “inflation is always
and everywhere a monetary phenomenon”


IS–LM model of aggregate demand
We take account of the opportunity cost of holding money:
– lr ; k, l > 0 (4.9)
The equation now expresses our contention that the demand
for real balances will increase with the volume of transactions,
but decrease with the opportunity cost, as measured by the
interest rate, r.
 P   Md  (if r is unchanged)
 r   Md  (if P is constant)


IS–LM model of aggregate demand
Government budget constraint and money supply:
G − T ≡ the budget deficit ≡ total government borrowing
 G is government expenditure on goods and services
 T is government tax revenue
G − T ≡ ∆MB + ∆Bs
 MB is the quantity of currency in existence
 Bs is the quantity of nonmonetary government debt in
existence (‘bonds’)
Fiscal Policy

Government
budget
constraint

Monetary Policy


OPEN ECONOMY MACROECONOMICS

Supply of money
in an open economy


Supply of money in an open economy
Think of the supply process as being simply a mechanism whereby the
stock of money (currency plus demand deposits) gets determined.
Understand the process, we need to take a look at the structure of the
banking system.


Supply of money in an open economy

A CENTRAL BANK
• Central bank is as the Issuer of the
banknotes they use.
• The central bank has the job of holding
the nation's reserves of gold and
foreign currency: FX
• The central bank differs from a

commercial bank in having one large
customer-the government: providing
credit: LG

How the government funds its deficit spending ?


Supply of money in an open economy

A CENTRAL BANK
How the government funds its deficit spending?
Suppose: a government decides to spend £ 100m:
• without raising any additional taxation.
• without borrowing from the non-bank public.
 The process: government approaching the
central bank for a loan.
*A loan: granted more or less automatically and
the accumulation of government securities held by
the central bank-'Lending to government‘: LG
* The form the loans take is the printing of
currency-be used by the government for its
additional expenditure.
Notice that currency printed counts as a liability of the central bank.


Supply of money in an open economy

Notice:
 The supply of currency: increased when the government borrows the loans
from the central bank.

MB : to the change in the quantity of currency issued- base money.
 The supply of currency: the government sometimes use the loan to buy back
its own IOUs (mainly gilt-edged securities or bonds) from their holders among
the nonbank public.
 MB: open market purchaseincreased MB


Supply of money in an open economy
THE COMMERCIAL BANKING
The balance sheet:
 Deposits by the public with the banks: D  a
liability of the bank.
 Part of the money stock : consists of demand
deposits is in fact a liability of the commercial
banking system.
What do banks do with the funds deposited
with them by the public?
To lendings (corporate, private individuals)
to pay any interest on deposits, indeed cover
their costs,…
Loans constitute assets of the banking
system.
The balance sheet:
MBb: the currency actually in a commercial bank's till at any moment and the
amount it has available on deposit with the central bank