Texts a show a contraction of the money supply in the short...

Texts: a. Show a contraction of the money supply in the short-run money market. b. Show the effect of the same contraction on net capital outflows (NCO). c. Show the effect of the change in NCO on the real exchange rate under a flexible exchange rate regime. d. Assume prices are sticky and that exchange rates are fixed, so the real exchange rate is fixed. NCO still shifts, but the foreign exchange market cannot reach an equilibrium – there is either an excess supply of currency or an excess demand. Under this scenario, who is more likely to suffer: exporters or importers?

Transcript

00:01 So here we're talking about the aggregate demand, aggregate supply equilibrium.

00:06 So first of all, we're at long run equilibrium.

00:09 What does that mean? long run equilibrium means that we are on the long run aggregate supply curve, right? that's in terms of prices and output, right? the long run aggregate supply curve tells us where potential output is, where the economy can operate sustainably.

00:28 Since we're at long run equilibrium, we have an equilibrium that is on this curve where aggregate demand and short run aggregate supply also intersect.

00:38 So this would be our equilibrium at time zero, where we start, right? so now in a, you're going to have the central bank print money.

00:49 Well, this tends to reduce interest rates, right? when the central bank prints money, it does so to lower interest rates.

00:56 That stimulates consumption and investment, and that stimulates aggregate demand.

01:03 So aggregate demand is going to shift out due to the central bank's money printing, and we end up at one, right? in the short run, this expansion of aggregate demand means that prices are rising and incomes are also rising, right? real incomes are also rising.

01:22 The economy is booming.

01:24 So c, the adjustment, adjustment means that prices, right, or pricing changes.

01:36 Firms are operating unsustainably at point one, right? they cannot continue to do so.

01:42 They are running at an unsustainably hot point...

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