Study Guides (248,167)
Canada (121,358)
Economics (462)
ECON 1BB3 (163)

lecture 29 ~ chapter 15.docx

6 Pages
Unlock Document

Hannah Holmes

What can the government of a small open economy do about business cycles?   government can only use one policy  fiscal policy or monetary policy depending on exchange rate “regime” (fixed exchange rates or flexible exchange rates) o flexible exchange rates:  nominal exchange rate – “e” is determined by market forces (supply & demand)  if pple buy foreign currency (selling Canadian dollars)  “e” to go down, which makes Real Exchancge Rate go down  if pple are buying Canadian dollars  “e” goes up, RER goes up o fixed exchange rates:  central bank  buy or sell canadiam dollars to keep the exchange rate fixed  goal is to shift AD to prevent recession… Expansionary Monetary policy. Flexible exchange rates  expansionary monetary policy = increase in the Ms  AD shift out  increase investment  decrease interest rate  Ms out to the right  Income increases  more money Md increases  Y increases (closed economy right now) increase in income from AD both curves shifting out to the right  (contractionary same set of steps but opposite direction)  r3 < rw  everyone prefers to buy foreign assets => pple need to buy foeign currency with Canadian dollars  everyones trying to sell their Canadian dollars values goes down, RER goes down  net exports increase, AD increase, Y increase, Md increases  this happens until r3 doesn’t exitst and we get to this point - small open economy with flexible exchange rates can use monetary policy in order to shift the AD curve Expansionary Fiscal policy, flexible exchange rates  Governement sepnding increases, AD increases, income increases, Md increases (we buy more stuff) Closed economy  R2 > rw  Want to buy Canadian assets  Pple buy Canadian dollars  RER increases, g/s more expensive than foreign g/s, import more of their goods, export less (NX decrease)  AD decreases, Income goes down, Md decreases  Complete crowding out Open economy – stays the same expansionary monetary policy, fixed exchange rates  Ms increasing, AD increase, income increase (y), Md inc
More Less

Related notes for ECON 1BB3

Log In


Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.