HOW POLICIES AND EVENTS AFFECT AN OPEN ECONOMY
Having developed a model to explain how key macroeconomic variables are determined in an open economy, we can now use the model to analyze how changes in policy and other events alter the economy’s equilibrium. As we proceed, keep in mind that our model is Just supply and demand in two markets: the market for loan able funds and the market for foreign-currency exchange. When using the model to analyze any event, we can apply the three steps outlined in ‘Chapter 4 we determine which of the supply and demand curves the even..Second, we determine which way the curves shift. Third, we use the supply-and-demand diagrams to examine how these shifts alter the economy’s equilibrium.