"Macroeconomics" study notes (4)

V. Total supply and demand models

• the reason
  • After introducing the discussion of inflation, a more comprehensive model than the Keynesian model is needed
  • The impact of fiscal policy on output and inflation
  • The impact of monetary policy on output and inflation
  • Economic short-term and long-term equilibrium
• core part
  • Main variables: output and inflation (or price)
  • The short-term aggregate supply curve (AS) slopes upward
  • The short-term aggregate demand curve (AD) slopes downward
  • The long-term total supply curve (LRAS) is perpendicular to the horizontal axis
• Economic response to shock
  • Factors affecting short-term demand
    • Factors such as exports and spontaneous consumption affect demand and change the position of the demand curve AD
  • Factors affecting short-term supply
    • Crude oil prices, weather, etc. lead to inflation and change the position of the short-term supply curve AS
    • Corporate inflation expectations change the position of the short-term supply curve AS
  • Factors affecting long-term supply
    • Long-term changes in supply due to long-term technological and institutional changes
• Coping with shocks
  • government policy
    • Government policy intervention
      • Advantages: output stays at a low level for a short time, and the cost of unemployment is small
      • Disadvantages; fiscal or monetary policies may have side effects, and the economy may overheat
    • Government policy does not interfere, market clears
      • Advantages: Does not require the government to use resources to regulate the economy, long-term inflation decline
      • Disadvantages: output stays at a low level for a longer period of time, and unemployment costs are high
• Understand short-term and long-term
  • Short-term (1-2 years)
    • Enterprises cannot quickly adjust prices when output reaches a long-term equilibrium level
  • Long-term (3-5 years)
    • The influence of price factors disappears, the market clears, and production capacity returns to potential production capacity

6. International Economy

• Exchange rate (in international economic exchanges, the exchange rate for different currencies is the price used)

  • Balance of Payment Account
    • Count transactions between a country and other countries
    • daily routine
      • Statistics of trade transactions
        • Import and export of products and services
        • Import and export of capital and labor
    • Capital account
      • Count the amount of asset transactions
        • The total value of sales of domestic assets to foreigners, less the total value of foreign assets purchased
        • Asset transactions include stocks, government debt, private debt, real estate taxes
  • Bilateral nominal exchange rate
    • The ratio of currency exchange between one country and another
    • Definition: the price of a foreign currency in domestic currency
    • In the trade between the two countries, the adjusted exchange rate (bilateral real exchange rate) that affects the short-term trade advantage
  • Purchasing Power Parity Exchange Rate (eppp)
    • A reasonable exchange rate should allow the same amount of currency to have the same purchasing power in different countries
    • use
      1. For some countries, the PPP exchange rate is a reasonable market valuation in the long run
      2. The PPP exchange rate can help us compare the actual output levels of different countries
  • Prices in developing countries are generally lower, and output converted at market exchange rates is underestimated
  • Nominal effective exchange rate
    • Essentially the average of multiple bilateral exchange rates
    • According to the importance of different countries in the international economy, we can give different weights to the exchange rates of different countries

• Exchange rate theory

  1. Purchasing power parity (based on trade)
     • Absolute purchasing power parity
       • A reasonable exchange rate should allow the same amount of one currency to have the same purchasing power in different countries
     • Relative purchasing power parity
       • If the inflation rate of one country is higher than that of another country, its currency should depreciate against that of another country
  2. Interest rate parity (based on capital circulation)
  • Macroeconomic variables required for forecasting using purchasing power parity and interest rate parity: real GDP, interest rate, currency issuance
  • For the long-term interest rate of more than 1 year, the model based on macro variables has a certain predictive ability
  • These models usually have low exchange rate accuracy when predicting interest rates within 1 year

• Exchange Rate System and Macroeconomic Policy

  • Exchange Rate System

    • Fixed exchange rate system
    • Floating exchange rate system
    • Intermediate type system

  • China's exchange rate system

    • China implements a floating exchange rate system
    • The maximum daily trading range of the exchange rate of RMB to USD: +/- 3%
    • Median price = closing exchange rate + a basket of currency exchange rate changes + countercyclical adjustment factor
      • Closing exchange rate-market supply and demand
      • A basket of currency exchange rate changes-the overall trend of exchange rates of various countries against the US dollar
      • Counter-cyclical adjustment factor--filter excessive volatility of market sentiment

  • Ternary paradox

    1. Stable or fixed exchange rate-conducive to trade and capital exchange between countries

    2. Free Flow of International Capital --- Open Capital Project

    3. Monetary policy autonomy--can use monetary policy to manage GDP and inflation

       The ternary paradox in international economics: a country can only choose at most two of the three objectives, not both

       Three options

       1. Fixed exchange rate + free flow of capital (the Taylor rule cannot be used to regulate the economy)
       2. Free capital flow + monetary policy autonomy
       3. Fixed exchange rate + monetary policy autonomy