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Chapter 11
The Open Economy
Normalized exchange
rates (1948 = 1)
Exchange Rates of the G7 Industrialized Countries
Fixed rate
Floating rate
4
regime
regime
3
2
1
0
1950 ’55 ’60 ’65 ’70 ’75 ’80 ’85 ’90
Figure 11.1
Canada
France
Germany
Italy
Japan
U.K.
2
©1999 South-Western College Publishing
Devaluation and the Balance of Payments
r (World real interest rate)
X(Y*, reA)
X(Y*, reB)
World supply of
capital to a small
open economy
A
rw
B
Domestic demand
for capital from the
world at two real
exchange rates
NBB
Figure 11.5
0
Capital
NBA
3
©1999 South-Western College Publishing
i (Nominal interest rate)
Long-Run Equilibrium in a Small Open
Economy with a Fixed Exchange Rate
w
i
(
DM-f DPf
LM
Mf Pf
IS
A
*
Y
Y (Income)
Figure 11.6
)
4
©1999 South-Western College Publishing
i (Nominal interest rate)
Long-Run Equilibrium in a Small Open
Economy with a Fixed Exchange Rate
iw + De
(
DMf DPf
LM
f
M Pf
IS
A
iw
Y*
Figure 11.7
)
Y (Income)
5
©1999 South-Western College Publishing
G7 Interest Rates (Government Bond Yields)
Yield (percentage)
25
20
15
10
5
0
1950 ’55 ’60 ’65 ’70 ’75 ’80 ’85 ’90
Figure 11.8
Canada
France
Germany
Italy
Japan
U.K.
U.S.
6
©1999 South-Western College Publishing
Inflation rate (percentage)
Inflation Rates in the G7 Countries
30
20
10
0
-10
1950 ’55 ’60 ’65 ’70 ’75 ’80 ’85 ’90
Figure 11.9
Canada
France
Germany
Italy
Japan
U.K.
U.S.
7
©1999 South-Western College Publishing
END