This post aims to demonstrate the dynamics of the vertical NX line augmented with the ISLM model. It is an extremely useful tool for us to understand simple trade between economies and it is indeed easy to learn as well! I am very sure your lecturers would have also given you a detailed explanation and hopefully, Quickienomics would be able to enhance your learning by supplementing you with a detailed recap!
When using macroeconomic models, we have to be very careful to differentiate between endogenous and exogenous variables. From the basics, we know that endogenous factors cause movements along curves. An example would be the crowding out effect where the economy moves backwards along the IS curve due to an increase in interest rates. Basically, endogenous variables are whatever variable that is on your X or Y axis. An exogenous factor would cause shifts of the curves. For example, we know that consumption and government spending is an exogenous variable of the IS model. Therefore, any changes in C, G or T would cause a shift.
Heading onto more macroeconomic concepts, economies can decide between a fixed or flexible exchange rate. Simply put, governments can choose either to let the exchange rates change due to demand and supply fluctuation of their domestic currency, or intervene by playing around with the forex (foreign exchange) markets. The reasons are simple and you will understand why after watching the video. It has got something to do with the effectiveness of fiscal or monetary policies. i.e. does output change according to what the government wants be it contractionary or expansionary intentions?
We all understand how demand and supply affects the price of a commodity, currency included, but how exactly does the government fix the exchange rates? You will find out the answer in the video but here’s some food for thought: Do you think demand and supply can manipulated? If yes, how can it be achieved? What are the measures one must take to ensure such a thing happens?
At the end of this video, you should be able to:
Some additional material:
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