On rise of real GDP, national population has incremented income that they use to buy more of foreign products and services. This enhances the level of imports. Substantial increment in the level of imports leads to reduction in the net exports. With the rise in the need for foreign exchange, the rate of foreign exchange results in the emergence of excessive demand situation. The currency appreciation at the domestic level is indicated by a fall within the exchange rate from e* to e1. In the given graph, fe indicates foreign exchange.
An increase in price level (PI) results in the decrease of exports that in turn enhances the net export. This again appreciates domestic currency.
With the rise in the price level of economy, demands of domestic products within the foreign market decreases. Now, export is termed as the sale of such domestic products into the foreign market. People in the foreign market consider the domestic products to be comparatively expensive and this reduces the level of export. The subsequent downfall of export results in the promotion of domestic currency (Mehr Export, weniger Import, 2014). The rate of exchange slides down from e* to e1. It results in the situation generating excessive demand within the economy. The enhanced price level at the current situation even leads rise in the level of imports since domestic population considers domestic products to be quite expensive as well as the process of foreign products to be comparatively lower than that of domestic products. So, they tend to purchase goods from the foreign marketers, thereby enhancing the level of imports. Increment in import level leads to increment within the demands for foreign exchange as well as reduction in the level of export leads to decrease in foreign exchange supply. Both the impacts cause a situation of excessive demand within the economy (Sabal, 2008).
When R is on a rise, capital is said to flow within the nation that results in the appreciation of domestic currency.
R is the domestic interest rate and when this R rises, investors in the foreign lands invest within the domestic bonds that result in the capital flow inside the country. Capital inflow causes enhanced supply of foreign exchange that leads to the decrease in the exchange rate. This decrement within the exchange rate is named as appreciation of domestic currency (Sharma, 2009).
Capital markets possess greater mobility provided foreign capital intends to flow quickly in the country when interest rates that are risk free increase slightly above the available rates within other countries. With greater capital mobility, the value of R becomes less influential upon the exchange rates as compare to PI or RGDP (Valentine, 2012).
The loan-able funds have demand that is inversely related to the interest rate, and hence the demand curve of such loan-able fund is negatively sloped. Supply of such loan-able funds is related positively with that of the interest rate that results in an upward sloping supply curve (Thompson, 2010). It is said to have achieved equilibrium at the point where the demand curve as well as the supply curve meet with each other. From this very equilibrium point, the equilibrium level of amount of loan-able funds as well as interest rate is derived.
The Central bank on engaging within the open market purchases, the supply of money increases within the economy. The increment of the money supply results in the downfall of domestic rate of interest. There is an increase in the supply of the real loan-able funds. The enhancement in the supply of real loan-able funds has been depicted by the shift of supply curve rightwards to SS1 that results in the fall of interest rate. The increase in the open market purchases causes the supply of RLF to increase that leads in the fall of R. This would decrease the exchange rate. Since the domestic interest rate is lower, the respective domestic economic agents would reduce their holdings of domestic bonds as well as they would also increase the foreign bonds holding as return earning from foreign bonds in quite high as compared to that earned from all domestic bonds. All investors would tend to sell off their respective domestic bonds as well as buy foreign bonds.
the purchases of open market would increase supply of RLF that leads to the fall of R. the government buying of the open market leads to the supply of finance within the economy to enhance. This enhances the supplying of real loan-able funds. It reduces the interest rate.
Low rate of real interest promotes households to borrow for financial purchases so that C rises. Likewise, low R promotes companies to buy new capital equipment and thus I rise. With low rate of interest the households easily borrow so as to finance all consumption. However, the investment as well as interest rate is related negatively. Low rate of interest leads in the rise of investment level.
On decrease of R within the real loan-able funds market, investment level rises as rate of interest as well as investment are related negatively. The corresponding rise in the investment level leads to overall increase in the aggregate demand. Increase in the aggregate demand curve is reflected by the shifting of the AD curve towards right. This rightward shift of the AD curve leads in the rise of price as well as output level.
As rate of interest lowers, investment level increases indeed. This causes an increment within the level of aggregate demand. Rise in the level of aggregate demand has been reflected by the right shift of the AD curve from AD1. The shift leads in the enhancement of the extent of real GDP from the position of Y* to Y1. There is also a simultaneous rise in the price level from P* to P1.
PI increases and the real GDP rises. With the shifting of the AD curve towards the right side on account of rise in investment, there is a rise in the price level. Also, real GDP rises.
A slight change in real GDP results in the increase of imports, simultaneous decrease in the net export, and depreciation in the domestic currency.
It is observed that the real GDP actually rises. An increment in the real GDP shows that domestic individuals possess increased income to buy foreign goods. This enhances the level of import. Net export is deemed to be the variance amidst exports as well as imports. With the rise of imports there is decrease in net exports. The overall demands for foreign exchange rely upon the import level. With the increase in the imports, the net demand for foreign exchange rises. The respective rise in demand for foreign exchange results in an increase in rate of foreign exchange. The increment of rate of foreign exchange is termed as depreciation.
Any sort of change in the position of PI results in the fall of exports that result in the corresponding decrease in the net export.
As referred to in the above situation, it is observed that an increment exists in the price level that refers to the concept of domestic products becoming more and more expensive for the foreigners. This lowers the extent of exports. Since net exports is the distinction amidst exports as well as imports, any fall in exports results in fall of net exports.
A change is R leads to the flowing out of foreign money from the nation. This leads to the depreciation of domestic currency.
Since the domestic interest rate is low, national or international investors prefer increasing their level of investment upon foreign bonds that provides increased return as compared to that of the domestic return. This leads to the flowing out of the capital from the nation. A situation also arises of excess demand for foreign exchange that drives the rate of exchange as well as domestic currency starts depreciating.
The cohesive effect of alterations in R, RGDP and PI results in the depreciation of domestic currency.
Any depreciation in the domestic currency would intend to enhance exports as well as net export. However, alterations in RGDP as well as PI would increase the net export. The net result would be a rise in the net export.
On increase in the rate of exchange, all domestic manufacturers consider it to be profitable to sell products across borders. By this approach, exporting of domestic goods to foreign lands would increase. This leads to an increment in net export (NE).
Net export will tend to help the goal of enhancing the nation’s economy.
The overall demand for funds that are loan-able is inversely proportional to the interest rate, and hence the corresponding demand curve of such loan-able funds is sloping negatively. The supply of such funds is related positively to the interest rate that leads to an upward rising sloping supply curve. It is said to have obtained equilibrium at the point where demand curve as well as supply curve meet and cross each other. From this point of equilibrium, one can derive the equilibrium level of amount of loan-able funds as well as interest rate.
Once the expenditure of government rises, the interest rate within the market increase as well as the corresponding supply of loan-able funds declines. It is reflected by the shifting of supply curve to the left side if real loan-able funds. On decrease of supply of real loan-able funds as well as shifting of supply curve leftward, the marker interest rate increases as well as supply of such funds declines. This is reflected by the direction of arrows.
Any government borrowing results in rising of R and declining of RLF.
On rising of government expense G r falling of taxes T, an increment takes place in AD as well as shifting of the curve rightward. It results in both price level as well as real GDP to rise.
When the variable G rises or T declines, there is a shift if the AD curve towards the right side of AD2, and so price level P* increases to P2 with corresponding rise of real GDP Y* to Y2. However, this enhances the deficit if the budget within the economy that the treasury usually finances with borrowed funds. The borrowed funds results in the increase of such loan-able funds that in turn results in the rise of interest rate. The increased rate of interest results in the flowing of foreign capital into the economy that leads to the depreciation of domestic currency. This drives down the AD2 to AD3 and that AS curves shifts up from AS to AS1. The real GDP shifts from Y* to Y2 and then falls down to Y3. The overall effect of the expansionary fiscal policy enhances the real GDP.
PI rises as well as RGDP enhances.
A change within RGDP results in the increase of imports and decrease of net exports.
It has been observed that the real GDP has incremented. The rise in real GDP implied that domestic people possess increased income to make more foreign purchases. It leads enhancement in imports. Net export is the difference amidst exports as well as imports. The level of net export decreases with increase in imports. Foreign exchange demands rely upon the import level. As imports incremented, foreign exchange demands also increased (Eraker, 2001). This led to a rise in the rate of foreign exchange. The rise of foreign exchange rate is called depreciation.
Any change in PI results in falling of export level that increases the net export.
From the mentioned situation above, it is identified that price level has enhanced that refers to the more expensiveness of the domestic goods fir foreigners. This declines export level. Since, net export refers to the difference amidst exports as well as imports, decline in exports leads to decline in net export.
The combined impact of PI as well as RGDP upon net export leads to the domestic currency to appreciate.
The alteration of R leads foreign money to flow within the nation. This causes the domestic currency to appreciate.
The impacts of R contradict those of PI as well as RGDP. If capital mobility is high, the domestic currency will depreciate (Dutertre-Le Poncin and Caix, 2008).
If the capital mobility is higher as well as the domestic currency appreciates, net export will decline. This will counter the goal of enhancing the national economy.
In an economy having free trade as well as free flow of foreign capital, expansionary fiscal policy would be less effective than that of a nation whose closed economy has few foreign influences (FLIFEL, 2013).
When the Central bank starts expansionary financial policy based on pegged exchange rate policy, the effects upon the foreign exchange market is in effective. However, this policy results import of domestic nation to increase as population possess increased money to buy gods from foreign lands (Hannah, 2008). The import of domestic nation is the export of foreign nation that means that increment in domestic import shows the rise of export of foreign nation. It shows the enhancement of domestic currency supply within the market of foreign exchange. The rate of exchange needs to be lowered at the original position, thereby making the monetary policy to be ineffective since exchange rate has to be pegged.
The rise in supply of Peso in fact has been incremented but as the exchange rate is pegged, it should return to the original position by reducing the supply of Peso. So, it is seen that the financial policy is quite ineffective under the system of fixed rate of exchange.
Due to the expansionary financial policy of the central bank, the peso would depreciate.
For maintaining the fixed exchange rate, the bank should buy dollars.
The actions of the central bank to manage the fixed exchange rate would reverse original expansionary financial policy (Dukes, 2006).
Monetary policy having fixed exchange rates is quite ineffective.
When fund is borrowed by the treasure for financing all deficits led by the expansionary monetary policy, there exists an increment in demand of real loan-able funds within the market that leads to the increase in the real rate of interest.
For financing all governmental deficits, it is a norm for the treasure to borrow funds that would increase the overall demands of real loan-able funds that is reflected by the shifting of the demand curve rightward of the loan-able funds (ChisÄƒgiu, 2012). The right shift leads the real rate of interest to increase as well as the amount of real loan-able funds also rises. The shift of demand curve rightward has been shown by the arrow directed towards DD1.
The government borrows results in R as well as RLF to rise.
When G (government spending) rises or the T (taxes) falls, then there is a rise in the AD and the curve shifts to the right. This causes the both the price level and the real GDP to rise.
When G increases or T declines, the AD curve moves right to AD2 as a result the price level P* becomes P2 and the level of real GDP Y* becomes Y2. As the expansionary monetary policy leads the government deficit to rise, the treasury borrows funds that increase the domestic rate of interest. The increase in the domestic interest rate attracts adequate foreign capital creating an upward pressure upon the exchange rate (Magdalinos and Kandilorou, 2001). But since exchange rate is fixed, the money supply should be increased that causes an extra increase in the AD from AD2 to AD3. This leads to the overall enhancement in the real GDP initially from Y* to Y2 and then from Y2 to Y3.
PI rises as well as RGDP increases.
On analyzing the situation, it is inferred that an expansionary monetary policy rises the real GDP as well as price as the AD curve shifts right but on account of fixed exchange rate, the money supply was enhanced that leads to further shift in the AD curve. This further increases the level of real GDP. As the AD curve shifts right, the price level gets increases (Venezuela plans to import and export gas, 2006).
The change in RGDP results imports to increase as well as net export to decrease.
It is observed that the real GDP has increased. The rise in the real GDP shows the domestic individuals possess increased income for making foreign purchases. This leads imports torise. Now net export is the difference between the exports as well as imports. So increase in imports decreases the level of net exports. The demand for foreign exchange relies upon the import level. As imports increased, demand for foreign exchange has increased (Weale, 2002). The increase in demand for foreign exchange results in increase in the rate foreign exchange.
The change in PI makes exports to fall that leads net expert to decrease.
The joint effect of PI as well as RGDP upon NE leads the domestic currency to appreciate.
The alteration in R makes foreign money to flow within nation. It causes the domestic currency to appreciate.
The effect of R contradicts those of PI as well as RGDP. If capital mobility is low, the domestic currency would appreciate.
If domestic currency declines, the central bank should purchase pesos for maintaining the fixed exchange rate. This effect will counter the goal of stimulating the nation’s economy (Wende, 2009).
If capital mobility is high, the domestic currency will appreciate. The central bank must purchase dollars to maintain the fixed exchange rate. This effect will support the goal of stimulating the nation’s economy.
The impossible trinity is a trilemma existing in international economics. It denotes three things that impossible to occur simultaneously. A fixed exchange rate Free movement of capital (capital controls are absent) and An independent monetary policy. The theory may be considered to be both based on hypothesis and also on the findings from studies where governments failed constantly for pursuing all the goals simultaneously.
ChisÄƒgiu, L. (2012). Orientation, Structure, Dynamics in International Goods Trade of Romania. Export Net Contribution to the Real Growth of GDP. Procedia Economics and Finance, 3, pp.1069-1074.
Dukes, W. (2006). Business Valuation Basics for Attorneys. Journal of Business Valuation and Economic Loss Analysis, 1(1).
Dutertre-Le Poncin, H. and Caix, A. (2008). « Import, export? ». Spirale, 46(2), p.51.
Eraker, B. (2001). MCMC Analysis of Diffusion Models With Application to Finance. Journal of Business & Economic Statistics, 19(2), pp.177-191.
FLIFEL, K. (2013). Technical Analysis on Markets with Memory. Business and Economic Research, 3(1).
Hannah, R. (2008). Post-Employment Covenants and Economic Losses. Journal of Business Valuation and Economic Loss Analysis, 3(1).
Magdalinos, M. and Kandilorou, H. (2001). Specification Analysis in Equations With Stochastic Regressors. Journal of Business & Economic Statistics, 19(2), pp.226-232.
Mehr Export, weniger Import. (2014). Nachrichten aus der Chemie, 62(6), pp.642-642.
Sabal, J. (2008). WACC or APV?. Journal of Business Valuation and Economic Loss Analysis, 2(2).
Sharma, S. (2009). A Political-Economy of the U.S. Subprime Meltdown. Economic Analysis and Policy, 39(2), pp.171-190.
Thompson, M. (2010). BRCA1 16 years later: nuclear import and export processes. FEBS Journal, 277(15), pp.3072-3078.
Valentine, T. (2012). International Influences on the Australian Economy in the Interwar Years.Economic Analysis and Policy, 42(3), pp.351-361.
Venezuela plans to import and export gas. (2006). Oil and Energy Trends, 31(3), pp.7-8.
Weale, M. (2002). Business Cycle Analysis. National Institute Economic Review, 182(1), pp.57-57.
Wende, S. (2009). Business Cycle Dynamics. Economic Analysis and Policy, 39(2), pp.205-234.
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