Chapter 13

The IS-LM-BP Approach

Abstract

This chapter considers economic goals from the point of view of an open economy, in which authorities must consider the impact of policy on balance of trade, capital flows, and exchange rates. It describes the major tools of macroeconomic policy used to achieve macroeconomic equilibrium: fiscal policy and monetary policy. The IS-LM-BP macroeconomic equilibrium diagram, in which IS represents goods market equilibrium, LM represents money market equilibrium, and BP represents balance of payments equilibrium, is examined in detail. Economic equilibrium requires that all three markets be in balance. Monetary and fiscal policy under fixed and floating exchange rates is discussed. The Asian financial crisis is ...

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