Lecture 17: Real Interest Rates / Open economy AD-AS frameworkReal and Nominal Interest RatesAD-AS in Open EconomySlide 4Lecture 17: Real Interest Rates / Open economy AD-AS framework•Nominal and real interest rates•AD-AS in an open economyReal and Nominal Interest RatesIS: Y = C(Y-T) + I(Y,r) + GLM: M = YL(i) P r = i - eThe Long Run: = = g - gem yChanges arerelatively small;a “constant.”Fisher hypothesis / Figures 14-2 / 14-6 /14-7AD-AS in Open Economy i = i * + E - E infl. Approx = 0 / disregard E dynamicseY = 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+ ) F(1-Y(t), z) LYnPAS (given P(t-1))AD (given E)Devaluation dynamics / Adjustment to an Overvaluation / Costs (expectations)Figures 21-1 / 21-2 /
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