Download Monetary & Fiscal Policy in a Global Economy

Monetary & Fiscal Policy in a
Global Economy
AP Macroeconomics
Where did we come from?

International trade and methods
of limiting trade are extremely
important to understanding much
of the current discussion about
the WTO and the NAFTA (North
American Free Trade
Agreement).
http://wikis.lib.ncsu.edu/index.php/The_North_American_Free_Trade_Agreement_(NAFTA)_and_the_Zapatista
s
Where did we come from?

http://en.wikipedia.org/wiki/Currency
In a previous lesson,
we discussed the
foreign exchange
market, and related the
demand for currency
that can be used in
trade to the supply
and demand curves.
Where are we going?


In the next lesson, we’ll combine the
knowledge of monetary & fiscal policy and
the economy developed in Units 3-5 with the
knowledge we’ve gained of international
finance.
We’ll explain & analyze the impact of
domestic policy on the foreign exchange rate.
Let’s Review…

…the short-run effects
of monetary & fiscal
policy on the domestic
interest rate:


Expansionary monetary
policy decreases the
interest rate in the short
run.
Expansionary fiscal
policy increases interest
rates.
Visual 4.3 Unit 4 Macroeconomics
What does this have to do with
international trade & finance?



Policy makers can’t ignore the international
effects of changes in monetary & fiscal policy.
Changes in the domestic and foreign interest
rates affect the supply and demand of domestic
and foreign currency, thus affecting the exchange
rate.
For example, if interest rate returns on
investments (let’s say bonds) in the United States
increases, the supply of US dollars increases and
the demand for foreign currency increases.
…and more effects…


Similarly, if income in one country rises,
consumers will demand more foreign goods
(and therefore, foreign currency) and in turn,
the supply of domestic currency increases.
Also, if the price level in Country A
increases, then people in Country A will want
to buy more goods from Country B, thus
increasing the demand for currency in
Country B and increasing the supply of
currency in Country A.
And now…

Some resources:
Reffonomics:
http://www.reffonomics.com/
Morton workbook: In class, Activity 54, optional
outside of class: Activity 55
NO Krugman Module
Monetary & Fiscal Policy in a
Global Economy Part II
AP Macroeconomics
Where did we come from?


Previously, we learned analyzed the impact
of domestic policy on the foreign exchange
rate.
We related the demand for currency that can
be used in trade to the supply and demand
curves.

For example, if Country A demands more
goods from Country B, then the demand for
Country B’s currency increases, and the
supply for Country A’s currency on the foreign
exchange market increases.
What else did we learn?



Similarly, if the currency in one country appreciates
(i.e. increases), then it will import more and export
less.
If the currency in one country depreciates
(decreases), it will export more and import less (that
is, its goods will cost less for another country to
import).
If the GDP increase in one country, then that country
will have more income and therefore will buy more
goods in another (or other) countries. This causes
the currency in one country to depreciate and to
appreciate in the other.
Works Cited




Economics of Seinfeld.
http://yadayadayadaecon.com/
Krugman, Paul, and Robin Wells. Krugman’s
Economics for AP. New York: Worth
Publishers.
Morton, John S. and Rae Jean B. Goodman.
Advanced Placement Economics: Teacher
Resource Manual. 3rd ed. New York: National
Council on Economic Education, 2003. Print.
Reffonomics. www.reffonomics.com.