The sum total of the production of final goods and services (defined as output that is not resold in any form during the accounting period) when valued at market prices is the gross national product. Determination of income and employment when there is no saving and investment; 2. Here’s the payment and interest cost schedule. Comparative value. Exchange Rate Determination Basic approaches Parity conditions Flow (BOP) approach Stock (asset market) approach In addition, need to account for important social & economic events, such as: Infrastructure weaknesses, Speculation, Cross-border FDI, Foreign political risks. In the monetary approach, the exchange rate is determined directly by the relative price level via purchasing power parity (PPP). Secondly, Keynes committed an error in rejecting real factors as the determinants of interest rate determination. In the real world, it is the uncertainty or risk that induces an individual to hold both. Macro Approaches to Foreign Exchange Determination By Menzie D. Chinn* University of Wisconsin and NBER November 25, 2011 Abstract Macroeconomic approaches to exchange rate determination are reviewed, with an emphasis on empirical models. Share Your PPT File. The results of decrease in money supply can be similarly worked out. As there is a gap between the receipt of income and spending, money is demanded. Count the annual income of the head, spouse or co-head, and other adult members of the family. KEYNESIAN MODEL VIII. Money supply curve, SM, has been drawn perfectly inelastic as it is institutionally given. Now it is clear that the speculative demand for money (Sdm) varies inversely with the rate of interest. 3. This is what Keynes called ‘liquidity trap’. 3. Cost. In the classical theory, aggregate supply curve AS is a vertical straight line at full-employment level of output YF. The Federal Reserve Bank controls interest rates by adjusting the federal funds rate, sometimes called the benchmark rate. 3.7. Determination of income and employment: Role of money and prices. ACHIEVMENT OF FULL EMPLOYMENT VII. 6.20, Dm is the liquidity preference curve. Disclaimer Copyright, Share Your Knowledge 2. This minimum rate of interest indicates absolute liquidity preference of the people. Consequently, its price will rise and interest rate will fall until demand for money becomes equal to the supply of money. Approaches to Employment Income and Interest Rate determination: Classical, Keynes (IS-LM) curve, Neo classical synthesis and New classical, Theories of Interest Rate determination and Interest Rate Structure. People with higher incomes keep more liquid money at hand to meet their need-based transactions. Ingo Pellengahr, who devoted most of his research to reviewing this literature, describes the situation That affects long-term and fixed interest rates.The third force is the banking industry. TOS4. To sum up, the result of increase in money supply is to raise money wages and prices in equal proportion, leaving real wages, employment and output unaffected. There is also the relative PPP approach. 3.7]. The demand for money has a negative slope because of the inverse relationship between the speculative demand for money and the rate of interest. Hicks and Hansen solved this problem in their IS-LM analysis by determining simultaneously the rate of interest and the level of income. Contrarily, if bond prices are expected to fall (or the rate of interest is expected to rise) in future, people will now sell bonds to avoid capital loss. An individual holds either bond or cash and never both. 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