ECON 201 Lecture 25: Exchange Rates and the Macroeconomy

• School: University of Maryland
• Department: Economics
• Course: ECON 201
• Professor: John Neri

Document Summary

An open economy trades with other nations. How do changes in exchange rates affect the domestic economy. How does fiscal and monetary policy work in a open economy. Y = c + i + g + (x=im) Determinants of net exports: ad increases when x increase or im decrease, foreign incomes. Booms or recessions in one country tend to be transmitted to other countries. Relative prices of foreign and domestic goods: relative prices of foreign and domestic goods, assume exchange rates are fixed, what happens to nx and gdp if us prices fall, holding prices in japan constant. Us goods relatively cheaper so consumers buy more. American goods, less japanese goods: in general. If the relative prices of a country"s exports fall net exports and real gdp increase. If the relative prices of a country"s exports rise net exports and real gdp decrease. U. s goods relatively cheaper again so effects same.