Chapter%204.%20Flexible%20Prices:%20The%20Monetary%20Model

1
Chapter 4. Flexible Prices The Monetary Model

• The Simple Monetary Model of a Floating Exchange
  Rate
• The Simple Monetary Model of a Fixed Exchange
  Rate
• Interest Rates in the Monetary Model

2
Monetary Model of a Floating Exchange rate

• Setting
• AD is vertical
• Md kPy Ms kPy kY
• PPP obtains at all times and SP P

3
Initial Equilibrium

• MS0 Md kPy kSPy
• and

4
AD With Quantity Function
5
Money Supply Increase Under Floating Rates
6
An Income Increase Under Floating Exchange Rates
7
A foreign Price Increase Under Floating Exchange
Rates
8
The Two-Country Model of A Floating Exchange Rate

• Md kPy

And if P/P S, then
9
The Simple Monetary Model of a Fixed Exchange Rate

• FX DC MS FX foreign currency reserves and
  S is fixed.

MS0 FX1 DC1
10
A Money Supply Increase Under Fixed Rates
11
Devaluation Under Fixed Exchange Rates
12
Interest Rates in the Monetary Model