Lecture 17: Real Interest Rates / Open economy AD-AS framework • Nominal and real interest rates • AD-AS in an open economyReal and Nominal Interest Rates IS: Y = C(Y-T) + I(Y,r) + G LM: M = YL(i) P r = i - πe g y Changes are relatively small; e a “constant.” The Long Run: π = π = gm -Fisher hypothesis / Figures 14-2 / 14-6 /14-7AD-AS in Open Economy ei = i * + E - E infl. Approx = 0 / disregard E dynamics Y = C(Y-T) + I(Y,i*) + G + NX(Y,Y*, E P* ) P + + - Y = Y( E P*, G, T ) P P(t) = P (t-1) (1+ µ) F(1-Y(t), z) LYn P AS (given P(t-1)) AD (given E) Devaluation dynamics / Adjustment to an Overvaluation / Costs (expectations) Figures 21-1 / 21-2 /
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