The document discusses balance of payments (BoP) and exchange rates. It defines BoP as the record of transactions between a country's residents and the rest of the world, consisting of the current account (CA) and capital account (KA). The CA records trade in goods and services and transfer payments, while the KA records purchases and sales of financial assets. Under a fixed exchange rate system, central banks intervene in currency markets to maintain exchange rates. Under a floating system, exchange rates adjust to balance supply and demand for foreign currency.

1. INTERNATIONAL LINKAGES Macroeconomics (EKO 503) Lecture VII Prof. Hermanto Siregar Download from: slideshare.net/aziesIT

8. Dynamics of IDR per USD

9. Source: Bank Indonesia (Processed) Dynamics of IDR per USD (Cont’d) Approximately stable around this level

10. Source: Bordo (2003) based on Reinhart and Rogoff (2002) Chronology of Exchange Rate Regime Period Major Regimes 1880-1914 Specie: Gold Standard (bimetalism, silver); currency unions; currency boards; floats 1919-1945 Gold Exchange Standard; floats; managed floats; currency unions (arrangements); pure floats, managed floats 1946-1971 Bretton Woods adjustable peg; floats (Canada); Dual/Multiple exchange rates 1973-2000s Free floats; managed floats, adjustable pegs, crawling pegs, basket pegs, target zones or bands; fixed exchange rates, currency unions, currency boards

16. IS IS’ LM i E E’ Y Y 0 Y’ Rise in Rise in Real Home Spending Foreign Spd Depreciation Income + + + Net Exports - + + Repercussion Effects: In an interdependent world, policy changes in a country affect may affect the RoW. When G is increased, Y increases and part of it will be spent on imports, so that foreign income will also rise. This increases their imports, adding to the domestic income expansion, etc.

21. Monetary expansion: Equilibrium shifts from E to E’  at E’ BoP deficits  exc.rate depreciates  central bank sells foreign money and receives domestic money  money supply declines  LM shifts back to initial position. i i=i f BP=0 LM LM’ IS E E’ 0 Fiscal expansion under fixed exc.rates with perfect capital mobility is, in contrast, extremely effective. Fiscal expansion (IS moves to the right)  increases in i and Y  increased in i sets off a capital inflow that would lead to exc.rate appreciation  central bank has to expand the money supply (LM shifts to the right)  increases income further. Equilibrium is restored when increased Ms enough to drive back the int.rate so that i=i f .

22. THE MUNDELL-FLEMING MODEL: PERFECT CAP.MOBILITY UNDER FLEXIBLE EXC. RATES Appr’n Deprec’n i=i f i 0 Y Output IS Effects of Exc.Rate on AD i f i 0 Y Output IS IS’ BP=0 LM E E’ Effects of an Increase in Demand for Exports Under fully flexible exc.rates the absence of intervention implies a zero BoP. Any CA deficit must be financed by private capital inflows; a CA surplus is balanced by capital outflows. Adjustments in the exc.rate ensure that the sum of CA and KA is zero. Effects of fiscal policy is analogue with the effects of increased demand for exports  there is complete crowding out  real disturbances to demand do not affect equilibrium output.