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Lecture 7

Lecture 7- Dunn dunn.pdf

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McGill University
Economics (Arts)
ECON 205
Tom Velk

the next step in this story is to say that you may have situations of combinations of problemsthe particular combinations of these problems may give you a challenge in the sense that you may need both restrictive and expansionary policies at the same time thats a James Mead Conflict CaseBOP surplus and domestic recessionnot a conflict really lot of money coming in from foreigners investing in our ecothe intersection is too lowincome relatively low not many imports going on cant spend all the money coming inuniversal expansion on monetary and fiscal side to fix thisshift IS aggressive direction right shift LM aggressive direction rightBOP deficit and domestic inflationnot a conflict eitherour initial situation is that the intersection is too high must be restrictive with all policiesraise taxes and stop subsidizing exports to make IS less aggressiverestrict incomeimport demand diminishes meaning less imports lower interest rates cause less foreign money to come inshift IS regressive direction leftshift LM regressive direction left BOP surplus and domestic inflationactual problemthe current Chinese case perhapsif you restrict the economy you will diminish inflation and price pressures BUT you reduce imports and the surplus gets worse assuming you want to attack itbut via lowering imports surplus gets worseif stimulate C to increase Mthen surplus goes down and inflation gets worseBUT as with China a surplus BOP is no problemmay be okay to buildup of reserves and with training of work force to be disciplined etc and not too richBOP deficit and domestic recessionif you restrict cash flow then imports go down then BOP deficit goes down surplus recession gets worse if stimulate C to fix recession then imports increase and make BOP deficit worseIF ALSO fixed X risk for X
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