The two chapters add up to a fairly complete introductory discussion of the topic. Chapter 22 covers the balance of payments and exchange rate determination, finishing with an enlightening review of the behaviour of exchange rates since the demise of the Bretton Woods system in the early s. Chapter 23 deals with the problems for stabilization policy in an open economy, emphasizing how flexible exchange rates and capital mobility influence the effectiveness of monetary and fiscal policy.
It also serves as an excellent review chapter for the whole of macroeconomics, as virtually every issue developed in the preceding macroeconomic chapters emerges in one way or another in this chapter. Some instructors choose to eliminate these last two chapters, no doubt because they run short of time and view this material as the most expendable or, perhaps, the most challenging.
This is unfortunate. All rights reserved. Certainly, many more students today come to economics courses curious about international economic problems than did fifteen or twenty years ago. Innovations in this edition In this Part analyses of aspects of the recent financial crisis are interwoven throughout. Chapter 20 has a new last section on financial crises; a new Box Chapter 21 has a new Box, new text and a new case study on the official rate lower-bound problem and Quantitative Easing, and an updated case study on the Japanese experience with these issues.
Chapter 22 has a new Box and new case study on the links between global imbalances and the financial crisis and a new case study on the asymmetric pressures for balance of payments adjustment. Chapter 23 has a new Box and case study on linkages in global financial markets and the transmission of shocks; a new Box on types of financial crisis; and a new Box on correlations between business cycles in different countries. Students should find this material easy to read, interesting, and a bit of relief from the sustained bout of theoretical and applied work of Part 5.
Many students arrive with some major misconceptions about money. This section is designed to inoculate students against the many myths and monetary cranks to which they may be exposed in everyday life.
Starting with barter, the text proceeds through the history and roles of money to the relative sophistication, in the third section, of modern money and definitions of the monetary aggregates in use in the UK in Box The final section of the chapter presents two models of how the supply of money is determined. This model tends to make the role of the banks seem rather passive. The second model takes into account the highly competitive markets in which modern banks operate and presents the banks in a more active role.
In this model banks find profitable lending opportunities and then find the funds with which to make the loan, playing all the time in the market for loans with its supply curve of deposits and demand curve for loans.
This model is more relevant currently, in an era when central banks aim to control the money supply by altering short-term interest rates. The first case study is on the Northern Rock crisis and links with Box Both are new to this edition. Notes for users of the previous edition Box The whole final section on financial crises is new, as is Box Both case studies are new and clearly linked to the financial crisis. See Box See Figure The monetary authorities then control the money supply the money stock via their influence over the total stock of deposits.
Using their knowledge of the demand for loans the monetary authorities set an interest rate to generate a certain level of demand for loans and then supply the required high-powered money at whatever interest rate they have chosen. The supply of high-powered money is thus demand determined at a chosen interest rate. Money is the most liquid of all assets. Money is a store of value for individuals and firms and it is also used as a unit of account.
These three roles of money mean that in a market economy money contributes towards the transparency and efficiency of markets. The difficulties associated with such arrangements can then lead to a discussion of the significant transactions costs that would be incurred should an economy not have money.
The question also lends itself to a discussion on the uses of money and the attributes of useful forms of money—money needs to be durable, portable, divisible, in restricted supply, and so on.
Many commodities have been used as money: pigs, cows, cigarettes, nylon stockings, seashells, and stone wheels, are but a few examples. It is divided into five main sections. The first starts with an exploration of money values and relative values, in which the authors point out that the neutrality of money is a long-run equilibrium concept—in the short run a change in the price level will involve changes in relative prices so that inflation will have real effects.
This is followed by a couple of important pages offering a general discussion of financial assets and the links between their market price, present value, and the rate of interest. The following four sections continue the development of the macroeconomic model from Part Five. Section two focuses on the theory of money demand, explaining the relationship between money demand, nominal interest rates, wealth, real GDP, and the price level.
The text is clear about this point. Once students understand the pricing of financial assets and the basics of money demand, they are ready to consider equilibrium in the money market and how this relates to the real side of the economy. This is a critical section. Experience shows that it is accessible to any first-year student but care in exposition, practice with exercises, and some repetition by instructors may be needed before students master it. The fourth section of the chapter explores macroeconomic cycles and aggregate shocks, using the aggregate demand and aggregate supply framework developed in previous chapters.
The main part of this section discusses the processes of adjustment to both aggregate demand and aggregate supply shocks, and indicates possible fiscal and monetary policy responses to such shocks. The section finishes with a reminder that stabilization policy is an imperfect art and the source of much controversy.
The implementation of monetary policy in the UK and in Europe is discussed in the fifth section of the chapter; the authors note that the arrangements described are relatively new and may well change. In both the UK and the euro zone the main objective of the central bank is to maintain price stability and the means chosen is the setting of the short-term interest rate. How this works in normal times is first explained and is now followed by a new section on the interest-rate lower bound problem and a case study on quantitative easing.
While the Bank now has greater independence of the government, it also has to account more frequently and openly for its decisions. The policy goal is still set by the UK government but the Bank chooses the means to best achieve this goal.
Setting an interest rate to control inflation involves a number of uncertainties, not the least being due to the time lags in the transmission mechanism. The transmission mechanism is discussed further in Chapter Figure Unlike the Bank of England, the ECB has the power to both set its target for price stability and choose its instrument.
A new sub-section on monetary policy in times of crisis follows. The first case study explains what quantitative easing is an how it may work to influence aggregate demand. The second case study looks at problems in the Japanese economy in the past two decades or so.
This is updated to use Japan as the country that first hit the interest-rate lower bound problem. The slowdown in the rate of growth, the increase in unemployment, the falling price level, and the financial crisis took many people by surprise and policy makers have been uncertain about their best course of action.
With the benefit of hindsight some of the reasons for these events are clearer and the text outlines several, before discussing why the usual monetary and fiscal policy responses have been less effective than was hoped.
The explanation found here is thorough. It also makes reference at several points to the real world, in which the authorities set the interest rate and the money supply adjusts to equate money demand and money supply. Traditional accounts had the interest rate determined by the demand for and supply of money, with the authorities controlling the supply of money.
The text has been updated where necessary and in light of recent events. Chrystal] on Amazon. Economics is a comprehensive book for undergraduate students of Management and Economics. The book comprises chapters on demand and supply. Building on the success of previous editions, Economics, Twelfth Edition, has been thoroughly updated and revised.
Rigorous yet also accessible to beginners, it! Economics, 6th edition, Prentice Hall, However, mention must be made of other books, which will be drawn upon during the course. To browse Academia. Skip to main content. By using our site, you agree to our collection of information through the use of cookies. To learn more, view our Privacy Policy. Log In Sign Up.
Download Free PDF. In this final piece to the symposium for a special issue of Pacific Economic Review on the theories and applications of second-best and third-best theories, Richard Lipsey and Yew-Kwang Ng provide. Economics: Amazon. Skip to main content. By using our site, you agree to our collection of information through the use of cookies. To learn more, view our Privacy Policy.
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