Modelo IS LM en ECONOMÍA ABIERTA ejercicios👍

Economics for Dummies: IS-LM Model in an Open Economy

Introduction to the IS-LM Model

• Eva Huesca introduces the topic of the IS-LM model, specifically in an open economy context, also known as the Mundell-Fleming model.

• The discussion emphasizes that both closed and open economies focus on short-term macroeconomic equilibrium with fixed prices; here, a constant price of 2 is maintained throughout the exercise.

Differences Between Closed and Open Economies

• In an open economy, net exports are present, which is a key distinction from a closed economy where such exports do not exist.

• The equilibrium condition for the IS curve in an open economy includes consumption, investment, government spending, and net exports.

Deriving the IS Curve

• The process involves substituting consumption, investment functions, government spending, and net exports into the equilibrium condition to derive the IS equation for an open economy.

• Interest rates (r) are treated as constants based on global interest rates since this is a small economy that cannot influence them.

Mathematical Operations on IS Equation

• The speaker explains how to rearrange terms mathematically to isolate income (Y), leading to a derived expression for Y in relation to other economic variables.

• It’s noted that interest rates do not appear in this final expression because they were substituted with a constant value.

Graphical Representation of IS Curve

• When graphing the IS curve for this model, it will have a negative slope due to the inverse relationship between income and real exchange rate.

Calculating LM Curve in Open Economy

• To calculate LM curve equilibrium, money demand equals money supply; adjustments are made by substituting r with 1 based on previous assumptions about global interest rates.

Characteristics of LM Curve

• The resulting LM equation does not include real exchange rate variables; thus it appears vertical when graphed—differentiating it from closed economy models where LM has positive slope characteristics.

Equilibrium Analysis

• In contrast to closed economies where both income and interest rates are determined at equilibrium points through intersection graphs (IS-LM), here only real exchange rate is derived upon equating curves.

Conclusion & Next Steps