Promoting active learning

1
Balance of Payments and Exchange Rates
2
Balance of Payments and Exchange Rates

• Alternative Exchange Rate Regimes

3
ALTERNATIVE EXCHANGE RATE REGIMES

• Internal and external policy objectives
• internal balance
• external balance
• narrow sense current account balance
• broad sense total currency flow balance

4
Internal and external balance
W, J
(a) Internal balance
O
YF
Ye1
National income
5
Internal and external balance
(b) External balance
r1
Exchange rate
Fixed exchange rate
O
Quantity of s
6
ALTERNATIVE EXCHANGE RATE REGIMES

• Internal and external policy objectives
• internal balance
• external balance
• narrow sense current account balance
• broad sense total currency flow balance
• possible conflicts between internal and external
  objectives

7
Internal and external balance
W, J
Assume that initially there is internal
imbalance at Ye2
W2
W1
J1
J2
O
Ye2
YF
Ye1
National income
8
Internal and external balance
W, J
W2
W1
J1
J2
O
Ye2
YF
Ye1
National income
9
Internal and external balance
S1 by UK
r1
Exchange rate
Fixed exchange rate
D by overseas residents
O
Quantity of s
10
Internal and external balance
S1 by UK
Exchange rate
r1
Or an imbalance in the narrow sense (a current
account deficit) under a floating exchange rate
D by overseas residents
O
Quantity of s
11
Effects on internal and (narrow) external balance
Current account surplus
2
1
Contractionary fiscal policy Lower consumption
Exchange rate depreciation Foreign boom
Internal balance
External balance
Recession
Boom
Exchange rate appreciation Foreign recession
Expansionary fiscal policy Higher consumption
3
4
Current account deficit
12
UK balance of payments as of GDP, 19702007
Source Financial Statement and Budget Report (H
M Treasury, 2005)
13
ALTERNATIVE EXCHANGE RATE REGIMES

• Internal and external policy objectives
• internal balance
• external balance
• narrow sense current account balance
• broad sense total currency flow balance
• possible conflicts between internal and external
  objectives
• Nominal and real exchange rates

14
ALTERNATIVE EXCHANGE RATE REGIMES

• Internal and external policy objectives
• internal balance
• external balance
• narrow sense current account balance
• broad sense total currency flow balance
• possible conflicts between internal and external
  objectives
• Nominal and real exchange rates
• real exchange rate index
• RERI NERI PX / PM

15
Sterling nominal and real exchange rate
indices (1990 100)
Source based on data in Interactive Database
(Bank of England) and International Statistics
(IMF)
16
Sterling nominal and real exchange rate
indices (1990 100)
Nominal exchange rate
Source based on data in Interactive Database
(Bank of England) and International Statistics
(IMF)
17
Sterling nominal and real exchange rate
indices (1990 100)
Nominal exchange rate
Source based on data in Interactive Database
(Bank of England) and International Statistics
(IMF)
18
Sterling nominal and real exchange rate
indices (1990 100)
Real exchange rate
Nominal exchange rate
Source based on data in Interactive Database
(Bank of England) and International Statistics
(IMF)
19
Sterling nominal and real exchange rate
indices (1990 100)
Real exchange rate
Nominal exchange rate
Source based on data in Interactive Database
(Bank of England) and International Statistics
(IMF)
20
ALTERNATIVE EXCHANGE RATE REGIMES

• Alternative exchange rate regimes
• completely fixed

21
(a) Total currency flow deficit
Exchange rate
O
Quantity of s
22
(b) Total currency flow surplus
S by UK
Exchange rate
Fixed rate
D from abroad
O
Quantity of s
23
ALTERNATIVE EXCHANGE RATE REGIMES

• Alternative exchange rate regimes
• completely fixed
• freely floating

24
ALTERNATIVE EXCHANGE RATE REGIMES

• Alternative exchange rate regimes
• completely fixed
• freely floating
• intermediate

25
ALTERNATIVE EXCHANGE RATE REGIMES

• Fixed exchange rates
• foreign exchange intervention
• effects on the money supply
• sterilisation
• correcting a disequilibrium
• expenditure reducing
• expenditure switching

26
ALTERNATIVE EXCHANGE RATE REGIMES

• Free-floating exchange rates
• automatic correction

27
Adjustment of the exchange rate to a shift in
demand and supply
S1
er1
Exchange rate
D1
O
Quantity of s
28
Adjustment of the exchange rate to a shift in
demand and supply
S1
er1
Exchange rate
D1
O
Quantity of s
29
ALTERNATIVE EXCHANGE RATE REGIMES

• Free-floating exchange rates
• automatic correction
• expenditure switching (the substitution effect)

30
ALTERNATIVE EXCHANGE RATE REGIMES

• Free-floating exchange rates
• automatic correction
• expenditure switching (the substitution effect)
• the process of adjustment

31
ALTERNATIVE EXCHANGE RATE REGIMES

• Free-floating exchange rates
• automatic correction
• expenditure switching (the substitution effect)
• the process of adjustment
• elasticities of currency demand and supply

32
Supply of pounds and the elasticity of demand for
imports
S
Exchange rate
Elastic demand for imports
O
Quantity of s
33
Supply of pounds and the elasticity of demand for
imports
Exchange rate
Inelastic demand for imports
S
O
Quantity of s
34
Unstable equilibrium
Exchange rate
r
S
D
O
Quantity of s
35
Unstable equilibrium
Exchange rate
r
S
D
O
Quantity of s
36
ALTERNATIVE EXCHANGE RATE REGIMES

• Free-floating exchange rates
• automatic correction
• expenditure switching (the substitution effect)
• the process of adjustment
• elasticities of currency demand and supply
• the MarshallLerner condition

37
ALTERNATIVE EXCHANGE RATE REGIMES

• Free-floating exchange rates
• automatic correction
• expenditure switching (the substitution effect)
• the process of adjustment
• elasticities of currency demand and supply
• the MarshallLerner condition
• expenditure changing (the income effect)

38
ALTERNATIVE EXCHANGE RATE REGIMES

• Free-floating exchange rates
• automatic correction
• expenditure switching (the substitution effect)
• the process of adjustment
• elasticities of currency demand and supply
• the MarshallLerner condition
• expenditure changing (the income effect)
• a rise in income

39
The income effect (stable prices)
Y
E1
Expenditure (E), exports (X), imports (M)
O
Y
40
The income effect (stable prices)
Y
E1
Expenditure (E), exports (X), imports (M)
a
O
Y1
Y
b
(X M)1
41
The income effect (stable prices)
Y
E1
Expenditure (E), exports (X), imports (M)
a
O
Y1
Y
b
(X M)1
42
The income effect (stable prices)
Y
E1
Expenditure (E), exports (X), imports (M)
a
O
Y1
Y
b
(X M)1
43
The income effect (stable prices)
Y
E1
Expenditure (E), exports (X), imports (M)
a
O
Y1
Y
b
(X M)1
44
The income effect (stable prices)
Y
E2
E1
Expenditure (E), exports (X), imports (M)
a
O
Y1
Y
b
(X M)1
45
ALTERNATIVE EXCHANGE RATE REGIMES

• Free-floating exchange rates
• automatic correction
• expenditure switching (the substitution effect)
• the process of adjustment
• elasticities of currency demand and supply
• the MarshallLerner condition
• expenditure changing (the income effect)
• a rise in income
• a rise in prices

46
ALTERNATIVE EXCHANGE RATE REGIMES

• Intermediate exchange rate regimes
• adjustable peg
• dirty floating
• crawling peg

47
The crawling peg within exchange rate bands
1.60
1.40
Exchange rate
O
Time
Central bank sells domestic currency
No intervention
No intervention
Central bank buys domestic currency
No intervention
48
ALTERNATIVE EXCHANGE RATE REGIMES

• Intermediate exchange rate regimes
• adjustable peg
• dirty floating
• crawling peg
• joint float

49
ALTERNATIVE EXCHANGE RATE REGIMES

• Intermediate exchange rate regimes
• adjustable peg
• dirty floating
• crawling peg
• joint float
• exchange rate bands

50
ALTERNATIVE EXCHANGE RATE REGIMES

• Intermediate exchange rate regimes
• adjustable peg
• dirty floating
• crawling peg
• joint float
• exchange rate bands
• exchange rate bands under the old ERM

51
Balance of Payments and Exchange Rates

• Fixed Exchange Rates

52
FIXED EXCHANGE RATES

• Response to contractionary internal shock
• short-run effect
• assumption relatively inflexible wages prices
• effects of reduced aggregate demand
• current account surplus
• reduced interest rates ? financial account
  deficit
• financial account effect likely to be the bigger
• to prevent exchange rate falling, the interest
  rate must thus not be allowed to fall so far
• money supply must be allowed to contract to match
  the fall in demand for money
• internal imbalance will persist

53
FIXED EXCHANGE RATES

• Response to contractionary internal shock
• long-run effect
• assume greater flexibility of wages prices
• this allows internal balance to be restored
• external effects of reduced AD
• large current account surplus from fall in real
  exchange rate
• reduced somewhat by the rise again in aggregate
  demand from higher exports and lower imports
• overall external balance restored
• current account surplus may persist

54
FIXED EXCHANGE RATES

• Response to contractionary external shock
• short-run effect
• assumption fall in exports
• current account deficit
• fall in X ? fall in AD ? fall in M
• financial account
• fall in AD ? fall in r
• if r is allowed to fall ? financial account
  deficit
• money supply must be reduced to prevent this
  happening ? this allows r to rise
• rise in r makes recession worse

55
FIXED EXCHANGE RATES

• Response to contractionary external shock
• long-run effect
• assumption fall in exports
• reduction in AD reduces inflation
• this reduces real exchange rate
• current account deficit is eliminated
• flexible prices restore internal balance too
• but the long term may be very long in coming!

56
FIXED EXCHANGE RATES

• Effectiveness of government policies
• monetary policy
• relatively ineffective
• fiscal policy
• relatively effective
• Causes of balance of payments problems under
  fixed rates
• different rates of inflation
• different rates of growth
• income elasticities of demand for imports higher
  than for exports
• long-term structural changes

57
FIXED EXCHANGE RATES

• Advantages of fixed exchange rates
• certainty
• no speculation (if rate is absolutely fixed)
• automatic correction of monetary errors
• prevents irresponsible government policies

58
FIXED EXCHANGE RATES

• Disadvantages of fixed exchange rates
• new classical view
• make monetary policy ineffective
• anti free market
• Keynesian view
• balance of payments deficits can lead to
  recession
• possibility of competitive deflation
• problems of international liquidity
• inability to adjust to shocks
• speculation

59
Balance of Payments and Exchange Rates

• Free-floating Exchange Rates

60
FREE-FLOATING RATES

• Response to shocks
• internal shocks
• purchasing-power parity theory
• limitations of theory in short run
• changes in interest rates affect financial
  account
• this affects current account in opposite
  direction
• external shocks
• changes in exchange rate help to insulate
  domestic economy from such shocks
• the path to long-run equilibrium

61
Exchange rate path to long-run equilibrium after
a shock at time t1
Nominal exchange rate
erL
O
Time
62
Exchange rate path to long-run equilibrium after
a shock at time t1
er1
Nominal exchange rate
erL
O
t1
Time
63
FREE-FLOATING RATES

• Speculation
• stabilising speculation

64
Stabilising speculation
S1
er1
People believe that exchange rate change is only
temporary.
Exchange rate
D1
O
Quantity of s
65
FREE-FLOATING RATES

• Speculation
• stabilising speculation
• destabilising speculation

66
Destabilising speculation
S1
er1
People believe that exchange rate change
indicates a trend.
Exchange rate
D1
O
Quantity of s
67
FREE-FLOATING RATES

• Speculation
• stabilising speculation
• destabilising speculation
• overshooting

68
FREE-FLOATING RATES

• Effectiveness of government policy
• monetary policy
• relatively effective
• direct effect on aggregate demand
• reinforced by a change in the exchange rate
• effect of speculation
• fiscal policy
• relatively ineffective
• direct effect on aggregate demand
• offset by effect on interest rates exchange rate

69
FREE-FLOATING RATES

• Advantages of free-floating rates
• automatic correction
• no problem of international liquidity and
  reserves
• insulation from external events
• governments free to pursue domestic policy
• Disadvantages of free-floating rates
• unstable exchange rates

70
Fluctuations between the euro and the dollar
71
Fluctuations between the euro and the dollar
US interest rate
72
Fluctuations between the euro and the dollar
US interest rate
ECB interest rate
73
Fluctuations between the euro and the dollar
US interest rate
ECB interest rate
74
Fluctuations between the euro and the dollar
US interest rate
/ ?
ECB interest rate
75
FREE-FLOATING RATES

• Advantages of free-floating rates
• automatic correction
• no problem of international liquidity and
  reserves
• insulation from external events
• governments free to pursue domestic policy
• Disadvantages of free-floating rates
• unstable exchange rates
• speculation

76
FREE-FLOATING RATES

• Advantages of free-floating rates
• automatic correction
• no problem of international liquidity and
  reserves
• insulation from external events
• governments free to pursue domestic policy
• Disadvantages of free-floating rates
• unstable exchange rates
• speculation
• uncertainty for business

77
FREE-FLOATING RATES

• Advantages of free-floating rates
• automatic correction
• no problem of international liquidity and
  reserves
• insulation from external events
• governments free to pursue domestic policy
• Disadvantages of free-floating rates
• unstable exchange rates
• speculation
• uncertainty for business
• lack of discipline on economy

78
Balance of Payments and Exchange Rates

• Exchange Rate Systems in Practice

79
EXCHANGE RATE SYSTEMS IN PRACTICE

• The Bretton Woods system (194373)
• the system
• role of the IMF
• correction through deflation or reflation
• correction through devaluation or revaluation
• Problems of adjustment
• disruption of devaluations
• J-curve effect of devaluation

80
The J-curve effect
X - M
0
Time
81
EXCHANGE RATE SYSTEMS IN PRACTICE

• The Bretton Woods system (194373)
• the system
• role of the IMF
• correction through deflation or reflation
• correction through devaluation or revaluation
• Problems of adjustment
• disruption of devaluations
• J-curve effect of devaluation
• stopgo policies

82
EXCHANGE RATE SYSTEMS IN PRACTICE

• The Bretton Woods system (194373)
• the system
• role of the IMF
• correction through deflation or reflation
• correction through devaluation or revaluation
• Problems of adjustment
• disruption of devaluations
• J-curve effect of devaluation
• stopgo policies
• speculation

83
EXCHANGE RATE SYSTEMS IN PRACTICE

• The Bretton Woods system (cont.)
• problems of international liquidity
• over-reliance on US dollar
• problem of US deficits and excess liquidity
• decline in confidence in the system
• the collapse of the system

84
EXCHANGE RATE SYSTEMS IN PRACTICE

• Managed floating 1972 onwards
• forms of managed flexibility
• extent of intervention
• forms of intervention
• justification of managed floating
• focus on long-term equilibrium exchange rate
• adjustment is less disruptive
• Problems with managed floating
• predicting the long-term equilibrium rate
• speculative financial movements
• conflicts with internal policy

85
Exchange rate indicesaverages for each period
(1995 100)
Based on data in European Economy Statistical
Annex (Commission of the European Union)
86
EXCHANGE RATE SYSTEMS IN PRACTICE

• UK experience of managed floating

87
/ exchange rate and exchange rate index
19762005
/
88
/ exchange rate and exchange rate index
19762005
/
89
/ exchange rate and exchange rate index
19762005
Index 1990100
/
90
/ exchange rate and exchange rate index
19762005
Index 1990100
/
91
EXCHANGE RATE SYSTEMS IN PRACTICE

• UK experience of managed floating
• effects of first oil crisis 19736 6

92
EXCHANGE RATE SYSTEMS IN PRACTICE

• UK experience of managed floating
• effects of first oil crisis 19736
• second oil crisis and the rise in monetarism

93
/ exchange rate and exchange rate index
19762005
Index 1990100
/
94
EXCHANGE RATE SYSTEMS IN PRACTICE

• UK experience of managed floating
• effects of first oil crisis 19736
• second oil crisis and the rise in monetarism
• effects of growing US budget and trade deficits
  in the 1980s

95
EXCHANGE RATE SYSTEMS IN PRACTICE

• UK experience of managed floating
• effects of first oil crisis 19736
• second oil crisis and the rise in monetarism
• effects of growing US budget and trade deficits
  in the 1980s
• the 1985 exchange crisis

96
/ exchange rate and exchange rate index
19762005
Index 1990100
/
97
EXCHANGE RATE SYSTEMS IN PRACTICE

• UK experience of managed floating
• effects of first oil crisis 19736
• second oil crisis and the rise in monetarism
• effects of growing US budget and trade deficits
  in the 1980s
• the 1985 exchange crisis
• joining and leaving the ERM

98
EXCHANGE RATE SYSTEMS IN PRACTICE

• UK experience of managed floating
• effects of first oil crisis 19736
• second oil crisis and the rise in monetarism
• effects of growing US budget and trade deficits
  in the 1980s
• the 1985 exchange crisis
• joining and leaving the ERM
• sterling in the mid 1990s

99
/ exchange rate and exchange rate index
19762005
Index 1990100
/
100
EXCHANGE RATE SYSTEMS IN PRACTICE

• UK experience of managed floating
• effects of first oil crisis 19736
• second oil crisis and the rise in monetarism
• effects of growing US budget and trade deficits
  in the 1980s
• the 1985 exchange crisis
• joining and leaving the ERM
• sterling in the mid 1990s
• recent experience

101
/ exchange rate and exchange rate index
19762005
Index 1990100
/
102
EXCHANGE RATE SYSTEMS IN PRACTICE

• UK experience of managed floating
• effects of first oil crisis 19736
• second oil crisis and the rise in monetarism
• effects of growing US budget and trade deficits
  in the 1980s
• the 1985 exchange crisis
• joining and leaving the ERM
• sterling in the mid 1990s
• recent experience
• problems of a high pound

103
EXCHANGE RATE SYSTEMS IN PRACTICE

• UK experience of managed floating
• effects of first oil crisis 19736
• second oil crisis and the rise in monetarism
• effects of growing US budget and trade deficits
  in the 1980s
• the 1985 exchange crisis
• joining and leaving the ERM
• sterling in the mid 1990s
• recent experience
• problems of a high pound
• exchange rate effects of inflation targeting

104
EXCHANGE RATE SYSTEMS IN PRACTICE

• The volatility of exchange rates
• causes of volatility
• money supply and inflation targets
• growth in financial movements
• abolition of exchange controls
• growth in IT
• growth in speculative activity
• growing belief that governments are powerless to
  prevent speculation

105
Balance of Payments and Exchange Rates

• The Open Economy and ISLM Analysis

106
THE OPEN ECONOMY AND ISLM ANALYSIS

• The BP curve

107
The BP curve
r
O
Y
108
The BP curve
r
BP
O
Y
109
The BP curve
r
BP
O
Y
110
The BP curve
r
Assume that national income rises
BP
a
r1
O
Y1
Y
111
The BP curve
r
Assume that national income rises
BP
a
r1
Deficit if rate of interest remains at r1
O
Y1
Y1
Y
112
The BP curve
r
BP
a
r1
O
Y1
Y1
Y
113
THE OPEN ECONOMY AND ISLM ANALYSIS

• The BP curve
• Analysis under a fixed exchange rate

114
THE OPEN ECONOMY AND ISLM ANALYSIS

• The BP curve
• Analysis under a fixed exchange rate
• equilibrium in the model

115
ISLMBP analysis fixed exchange rates
r
BP
O
Y
Full equilibrium in the goods, money and foreign
exchange markets
116
THE OPEN ECONOMY AND ISLM ANALYSIS

• The BP curve
• Analysis under a fixed exchange rate
• equilibrium in the model
• movement to a new equilibrium

117
THE OPEN ECONOMY AND ISLM ANALYSIS

• The BP curve
• Analysis under a fixed exchange rate
• equilibrium in the model
• movement to a new equilibrium
• effects of fiscal policy

118
ISLMBP analysis fixed exchange rates
r
O
Y
An expansionary fiscal policy
119
ISLMBP analysis fixed exchange rates
r
LM1
b
r2
BP
Balance of payments surplus causes money supply
to expand
a
r1
IS2
IS1
O
Y1
Y2
Y
An expansionary fiscal policy
120
ISLMBP analysis fixed exchange rates
r
LM1
b
r2
BP
a
r1
IS2
IS1
O
Y1
Y2
Y
An expansionary fiscal policy
121
ISLMBP analysis fixed exchange rates
r
LM1
a
r1
IS1
O
Y1
Y
An expansionary fiscal policy BP curve steeper
than LM curve
122
ISLMBP analysis fixed exchange rates
r
BP
LM1
b
r2
a
r1
IS2
IS1
O
Y1
Y
An expansionary fiscal policy BP curve steeper
than LM curve
123
ISLMBP analysis fixed exchange rates
r
BP
LM1
b
r2
Balance of payments deficit causes money supply
to contract
a
r1
IS2
IS1
O
Y1
Y2
Y
An expansionary fiscal policy BP curve steeper
than LM curve
124
ISLMBP analysis fixed exchange rates
r
BP
LM1
b
r2
a
r1
IS2
IS1
O
Y1
Y2
Y
An expansionary fiscal policy BP curve steeper
than LM curve
125
THE OPEN ECONOMY AND ISLM ANALYSIS

• The BP curve
• Analysis under a fixed exchange rate
• equilibrium in the model
• movement to a new equilibrium
• effects of fiscal policy
• effects of monetary policy

126
ISLMBP analysis fixed exchange rates
r
LM1
BP
a
r1
IS
O
Y1
Y
An expansionary monetary policy
127
ISLMBP analysis fixed exchange rates
r
LM1
LM2
BP
a
r1
IS
O
Y1
Y
An expansionary monetary policy
128
ISLMBP analysis fixed exchange rates
r
LM1
LM2
BP
a
r1
Balance of payments deficit causes money supply
to contract again
b
r2
IS
O
Y1
Y2
Y
An expansionary monetary policy
129
ISLMBP analysis fixed exchange rates
r
LM1
LM2
BP
a
r1
b
r2
IS
O
Y1
Y2
Y
An expansionary monetary policy
130
THE OPEN ECONOMY AND ISLM ANALYSIS

• Analysis under free-floating rates
• effects of exchange rate changes on the BP curve

131
Movements in the BP curve
r
SURPLUS
O
Y
132
Movements in the BP curve
r
BP
DEFICIT
O
Y
133
THE OPEN ECONOMY AND ISLM ANALYSIS

• Analysis under free-floating rates
• effects of exchange rate changes on the BP curve
• achievement of equilibrium

134
THE OPEN ECONOMY AND ISLM ANALYSIS

• Analysis under free-floating rates
• effects of exchange rate changes on the BP curve
• achievement of equilibrium
• effects of fiscal policy

135
ISLMBP analysis floating exchange rates
r
BP
O
Y
An expansionary fiscal policy
136
ISLMBP analysis floating exchange rates
r
LM
b
BP
r2
a
r1
IS2
IS1
Balance of payments surplus causes the exchange
rate to appreciate
O
Y2
Y1
Y
An expansionary fiscal policy
137
ISLMBP analysis floating exchange rates
r
LM
b
BP
r2
a
r1
IS2
IS1
O
Y2
Y1
Y
An expansionary fiscal policy
138
ISLMBP analysis floating exchange rates
r
LM
b
BP1
r2
a
r1
IS2
IS1
O
Y2
Y1
Y
An expansionary fiscal policy
139
ISLMBP analysis floating exchange rates
r
LM
a
r1
IS1
O
Y1
Y
An expansionary fiscal policy BP curve steeper
than LM curve
140
ISLMBP analysis floating exchange rates
r
BP1
LM
b
r2
Balance of payments deficit causes exchange rate
to depreciate
a
r1
IS2
IS1
O
Y2
Y1
Y
An expansionary fiscal policy BP curve steeper
than LM curve
141
ISLMBP analysis floating exchange rates
r
BP1
LM
b
r2
a
r1
IS2
IS1
O
Y2
Y1
Y
An expansionary fiscal policy BP curve steeper
than LM curve
142
ISLMBP analysis floating exchange rates
r
BP1
LM
b
r2
a
r1
IS2
IS1
O
Y2
Y1
Y
An expansionary fiscal policy BP curve steeper
than LM curve
143
THE OPEN ECONOMY AND ISLM ANALYSIS

• Analysis under free-floating rates
• effects of exchange rate changes on the BP curve
• achievement of equilibrium
• effects of fiscal policy
• effects of monetary policy

144
ISLMBP analysis floating exchange rates
r
LM1
BP1
a
r1
IS1
O
Y1
Y
An expansionary monetary policy
145
ISLMBP analysis floating exchange rates
r
LM1
LM2
BP1
a
r1
The balance of payments deficit causes the BP
line to shift downward
r2
b
IS1
O
Y2
Y1
Y
An expansionary monetary policy
146
ISLMBP analysis floating exchange rates
r
LM1
LM2
BP1
a
r1
r2
b
IS1
O
Y2
Y1
Y
An expansionary monetary policy
147
ISLMBP analysis floating exchange rates
r
LM1
LM2
BP1
a
r1
r2
b
IS1
O
Y2
Y1
Y
An expansionary monetary policy