TAILIEUCHUNG - Lecture Economics (9/e): Chapter 37 - David C. Colander

Chapter 37 - Macro policy in a global setting. After reading this chapter, you should be able to: Discuss why there is significant debate about what . international goals should be, describe the paths through which monetary and fiscal policy affect the trade balance, summarize the reasons why governments try to coordinate their monetary and fiscal policies, explain how restoring . competitiveness will likely affect . policy in the future. | The actual rate of exchange is largely governed by the expected behavior of the country’s monetary authority. — Dennis Robertson Macro Policy in a Global Setting Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Chapter Goals Discuss why there is significant debate about what . international goals should be Describe the paths through which monetary and fiscal policy affect the trade balance Summarize the reasons why governments try to coordinate their monetary and fiscal policies Explain how restoring . competitiveness will likely affect . policy in the future 2 Ambiguous International Goals of Macroeconomic Policy There is general agreement about the domestic goals of macroeconomic policy: We want low inflation, low unemployment, and high growth The international goal of . macro policy is to maintain the . position in the world economy, but there is debate about what achieving that goal means Do we want a high or a low exchange rate? Do we want a balance of trade surplus or a trade deficit? Should we even pay attention to the balance of trade? 3 The Exchange Rate Goal Depending on the state of the economy, there are arguments for both high and low exchange rates Advantages of high exchange rates: Foreign currencies are cheaper, so imports are cheaper Competition from cheaper imports keeps . inflation low Disadvantages of high exchange rates: Imports increase and exports decrease causing a trade deficit Trade deficits can have a contractionary effect on the economy and have contributed to the structural stagnation the . economy has recently experienced 4 The Trade Balance Goal The trade balance is the difference between a country’s exports and imports Running a trade deficit in the short run has positive and negative effects Imports exceed exports, so we’re consuming more than we could if we didn’t run a deficit There is less demand for . goods leading to higher unemployment, slower growth, and lower

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