Chapter 11 The Open Economy Normalized exchange rates

Chapter 11 The Open Economy

Normalized exchange rates (1948 = 1) Exchange Rates of the G 7 Industrialized Countries Fixed rate Floating rate 4 regime 3 2 1 0 1950 ’ 55 ’ 60 ’ 65 ’ 70 ’ 75 ’ 80 ’ 85 ’ 90 Figure 11. 1 Canada France Germany Italy Japan U. K. 2 © 1999 South-Western College Publishing

Devaluation and the Balance of Payments r (World real interest rate) X(Y*, re. A) X(Y*, re. B) World supply of capital to a small open economy A rw B NBB Figure 11. 5 Domestic demand for capital from the world at two real exchange rates 0 Capital NBA 3 © 1999 South-Western College Publishing

i (Nominal interest rate) Long-Run Equilibrium in a Small Open Economy with a Fixed Exchange Rate w i ( M-f Pf LM Mf P f IS A * Y Y (Income) Figure 11. 6 ) 4 © 1999 South-Western College Publishing

i (Nominal interest rate) Long-Run Equilibrium in a Small Open Economy with a Fixed Exchange Rate iw + e ( Mf Pf LM f M Pf IS A iw Y* Figure 11. 7 ) Y (Income) 5 © 1999 South-Western College Publishing

G 7 Interest Rates (Government Bond Yields) Yield (percentage) 25 20 15 10 5 0 1950 ’ 55 ’ 60 ’ 65 ’ 70 ’ 75 ’ 80 ’ 85 ’ 90 Figure 11. 8 Canada France Germany Italy Japan U. K. U. S. 6 © 1999 South-Western College Publishing

Inflation rate (percentage) Inflation Rates in the G 7 Countries 30 20 10 0 -10 1950 ’ 55 ’ 60 ’ 65 ’ 70 ’ 75 ’ 80 ’ 85 ’ 90 Figure 11. 9 Canada France Germany Italy Japan U. K. U. S. 7 © 1999 South-Western College Publishing

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