Transcript exchange rates and macro policy

Module 44
Exchange
Rates and
Macroeconomic Policy
KRUGMAN'S
MACROECONOMICS for AP*
Margaret Ray and David Anderson
What you will learn
in this Module:
• The meaning and purpose of devaluation
and revaluation of a currency under a
fixed exchange rate regime
• Why open-economy considerations affect
macroeconomic policy under floating
exchange rates
Devaluation and Revaluation of
Fixed Exchange Rates
Why would Highlanders want to revise
its fixed exchange rate?
Devaluation and Revaluation of
Fixed Exchange Rates
Devaluing (depreciate) the Lander.
Maybe Highlander has a recessionary gap.
1. Takes fewer US dollars to buy 1 Lander.
2. Goods now less expensive for American consumers.
3. US goods more expensive for Highlanders.
4. Reduces imports from US.
5. Highlander would experience an increase in net
exports from US.
6. AD would shift right.
7. GDP grows.
Devaluation and Revaluation of
Fixed Exchange Rates
Revaluing (appreciate) the Lander.
Maybe Highlander has a inflationary gap.
1. Takes more US dollars to buy 1 Lander.
2. Goods now more expensive for American consumers.
3. US goods less expensive for Highlanders.
4. Increases imports from US.
5. Highlander would experience an decrease in net
exports from US.
6. AD would shift left.
7. Reduces inflation.
Monetary Policy Under a Floating
Exchange Rate Regime
•Ability to pursue independent monetary policy
•Monetary policy results in changes in exchange
rates and leads to other macroeconomic effects
•Changes in interest rates have a direct effect in
the exchange rates and influence net exports
International Business Cycle
•Shocks from abroad
•Synchronized business cycles
•Exchange rate regime influences synchronization of
business cycles
•Floating exchange rates should lessen the impact of
foreign shocks