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COURSE OUTLINE
Part 1. Overview of economics
•Chapter 1. Introduction to macroeconomics
MACROECONOMICS •Chapter 2. The data of macroeconomics
Part 2. Real economy in long run
•Chapter 3. Production and growth
•Chapter 4. Open economy: Basic concepts
•Chapter 5. Money and inflation
Tran Thi Thanh Huyen (Dr.)
Part 3. Short run Fluctuation
Faculty of Economics - Banking Academy of Vietnam
Mobile number: 098 383 0104 •Chapter 6. Aggregate Demand and Aggregate Supply
Email: huyenttt0104@gmail.com •Chapter 7. IS – LM model
Interactive PowerPoint Slides by:
V. Andreea Chiritescu •Chapter 8. Macroeconomic policy in open economy
Eastern Illinois University
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Reading materials

Chapter 31, 32. Mankiw, N.G (2021), Principles

of economics, 9th Edition, Cengage Learning.

CHAPTER

4 Open economy: Basic concepts

Interactive PowerPoint Slides by:

V. Andreea Chiritescu
Eastern Illinois University
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Purpose Learning objectives

Develop the basic concepts macroeconomists use to study By the end of this chapter, students should:
open economies – Explain the relationship between net exports and net
Address why a nation’s net exports must equal its net capital capital outflow; saving, investment, and international
outflows flows.
Address the concepts of the nominal and real exchange rate;
develop a theory of exchange rate determination; distinguish – Describe the loanable funds market.
exchange rate mechanisms. – Describe the market for foreign-currency exchange;
Establish the interdependence of a number of economic contrast a country's nominal exchange rate with its
variables in an open economy, especially the relationships real exchange rate; distinguish exchange rate
between the prices and quantities in the market for loanable mechanisms.
funds, the prices and quantities in the market for foreign-
currency exchange. – Analyze the effect of macroeconomic policies on the
Analyze the impact of a variety of government policies on an foreign-currency exchange market and other
economy’s exchange rate and trade balance. macroeconomic variables.

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Contents I International Flows of Goods and Capital

• Closed economy
1. International flows of goods and – Economy that does not interact with other
capital economies in the world
• Open economy
– Economy that interacts freely with other
2. Market for loanable funds economies around the world

3. Foreign exchange market

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Open economy I International Flows of Goods and Capital

The Flow of Goods

• Exports
– Goods and services that are produced
It buys and sells It buys and sells capital domestically and sold abroad
goods and assets in world financial
services in world markets • Imports
product markets
– Goods and services that are produced
Import
Purchase of foreign assets
by domestic residents abroad and sold domestically
Flow of Flow of
capital

Export
goods
Purchase of domestic assets
by foreigners
• Net exports, NX (Trade balance)
= Value of exports – value of imports
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Trade Surpluses & Deficits Factors that Influence NX

• Trade surplus, NX > 0 • Factors that might influence a country’s
– Exports are greater than imports exports, imports, and net exports:
• The country sells more goods and services – Consumers’ tastes for foreign and domestic
abroad than it buys from other countries goods
• Trade deficit, NX < 0 – Prices of goods at home and abroad
– Imports are greater than exports – Exchange rates at which foreign currency
• The country sells fewer goods and services
trades for domestic currency
abroad than it buys from other countries – Incomes of consumers at home and abroad
• Balanced trade: Exports = Imports – Transportation costs
– Government policies
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Active Learning 1: Active Learning 1: Answers A, B

Variables that affect NX
What do you think would happen to U.S. net A. Canada experiences a recession (falling
exports if: incomes, rising unemployment)
A. Canada experiences a recession (falling U.S. net exports would fall
incomes, rising unemployment) due to a fall in Canadian consumers’
B. U.S. consumers decide to be patriotic and purchases of U.S. exports
buy more products “Made in the U.S.A.” B. U.S. consumers decide to be patriotic and
C. Prices of goods produced in Mexico rise buy more products “Made in the U.S.A.”
faster than prices of goods produced in U.S. net exports would rise
the U.S. due to a fall in imports

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Active Learning 1: Answers, C I International Flows of Goods and Capital

C. Prices of goods produced in Mexico rise The Flow of Financial Resources
faster than prices of goods produced in the • Capital outflow: Purchase of foreign assets by
U.S. domestic residents (Invest capital to abroad)
– Foreign direct investment
This makes U.S. goods more attractive
– Foreign portfolio investment
relative to Mexico’s goods.
• Capital inflow: Purchase of domestic assets by
Exports to Mexico increase, imports from
foreigners (receive foreign capital from abroad)
Mexico decrease, so U.S. net exports – Foreign direct investment
increase. – Foreign portfolio investment
• Net capital outflow (NCO)
NCO = Capital outflow – Capital inflow

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Net Capital Outflow, NCO Variables that Influence NCO

NCO measures the imbalance in a country’s – Real interest rates paid on foreign
trade in assets: assets/ domestic assets
• When NCO > 0, “capital outflow” – Perceived economic and political risks
– Domestic purchases of foreign assets exceed of holding foreign assets
foreign purchases of domestic assets
– Government policies affecting foreign
• When NCO < 0, “capital inflow” ownership of domestic assets
– Foreign purchases of domestic assets exceed
domestic purchases of foreign assets

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The Equality of NX and NCO The Equality of NX and NCO

• An accounting identity: NCO = NX • When a Japanese consumer purchases a good from the U.S.,
– Every transaction that affects NX also affects NCO by the – U.S. exports and NX increase
same amount (and vice versa) – The US firm receives Japanese Yen, then
• Case 1: stuffs in the mattress (the firm has a yen for yen)  the firm
• When a foreigner purchases a good acquires a foreign asset (Japanese Yen)  increase in US.net
from the U.S., capital outflow
• Case 2: buys stock in a Japanese corporation/a Japanese
– U.S. exports and NX increase government bond  increase in US. net capital outflow (which
– The foreigner pays with currency or assets, so the U.S. equals the increase in US. net exports)
acquires some foreign assets, causing NCO to rise. • Case 3: buys a good made in Japan  U.S. imports increase  net
exports are unchanged. In this case, no American ends up
• When a U.S. citizen buys foreign goods, acquiring a foreign asset and no foreigner ends up acquiring a U.S.
asset, so there is also no impact on U.S. net capital outflow
– U.S. imports rise, NX falls
• Case 4: exchanges Yen for US dollar. The bank then can buy
– The U.S. buyer pays with U.S. dollars or assets, so the other Japanese assets (a U.S. net capital outflow); buy a Japanese good (a
country acquires U.S. assets, causing U.S. NCO to fall. U.S. import); or sell the yen to another American who wants to
make such a transaction
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In the end, U.S. net exports must equal U.S. net capital outflow.21
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The Equality of NX and NCO Trade Surplus and NCO

• When a U.S. citizen buys $50M goods from China, • A country running a trade surplus, NX > 0
– U.S. imports rise, NX falls – Selling more goods and services to foreigners
– Something must happen to that $50 million than it is buying from them.
• China could use the $50 million to invest in the U.S. economy. This capital
inflow from China might take the form of Chinese purchases of U.S. – Use the foreign currency it receives from the
government bonds. In this case, the purchase of the clothing reduces U.S.
net exports, and the sale of bonds reduces U.S. net capital outflow. net sale of goods and services abroad to buy
• Alternatively, China could use the $50 million to buy a plane from Boeing, foreign assets.
the U.S. aircraft manufacturer. In this case, the U.S. import of clothing
balances the U.S. export of aircraft, so net exports and net capital outflow – Capital is flowing out of the country, NCO > 0
are both unchanged.
– In all cases, the transactions have the same effect on net
exports and net capital outflow.

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Trade Deficit and NCO I International Flows of Goods and Capital

• A country is running a trade deficit, NX < 0 Saving, Investment and the International Flows
– Buying more goods and services from • Open economy: Y = C + I + G + NX
foreigners than it is selling to them.  Y – C – G = I + NX (1)
– Financing the net purchase of these goods and • National saving: S = Y – C – G (2)
services in world markets by selling assets In which, S = (Y – T – C) + (T – G)
abroad. S = Personal saving + Government saving
– Capital is flowing into the country, NCO < 0 (1), (2)  S = I + NX
Because NX = NCO  S = I + NCO
National Saving = Domestic investment + Net capital outflow

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I International Flows of Goods and Capital I International Flows of Goods and Capital
Saving, Investment and the International Flows Three possible outcomes for an open economy

• Trade surplus: Trade surplus Balanced trade Trade deficit

(Ex > Im) (Ex = Im) (Ex < Im)
• Exports > Imports (Net exports > 0)
• Y > Domestic spending (C+I+G) Nx > 0 Nx = 0 Nx < 0
• S > I and NCO > 0
NCO > 0 NCO = 0 NCO < 0
• Trade deficit:
• Exports < Imports (Net exports < 0) Y > C + I +G Y = C + I +G Y < C + I +G
• Y < Domestic spending (C+I+G)
• S < I and NCO < 0 S>I S=I S<I
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II Market for Loanable Funds II Market for Loanable Funds

• In an open economy, S = I + NCO
Saving = Domestic investment + Net capital outflow
• Market for loanable funds:
– Supply of loanable funds:
• from national saving (S)
– Demand for loanable funds:
• from domestic investment (I)
• and net capital outflow (NCO)

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II Market for Loanable Funds II Market for Loanable Funds

• Net outflow of capita when NCO > 0 How NCO depends on the real interest rate
r
– Net purchase of capital overseas adds to The real interest rate, r, is the
the demand for domestically generated real return on domestic
loanable funds assets. r1
A fall in r makes domestic
• Net inflow of capital when NCO < 0 assets less attractive relative r2
– Capital resources coming from abroad to foreign assets.
reduce the demand for domestically – Domestic people purchase NCO
more foreign assets.
generated loanable funds – People abroad purchase NCO1 NCO2 NCO
fewer domestic assets.
– NCO rises. Net capital outflow
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II Market for Loanable Funds II Market for Loanable Funds

Real
• Both I and NCO Supply of loanable funds
Loanable funds Interest
(from national saving)
Rate
depend negatively on
r
r, so the D curve is Equilibrium
S = saving real interest
downward-sloping. rate Demand for loanable
• Saving depends funds (for domestic
investment and net
positively on r so the capital outflow)
r1
S curve is upward- Equilibrium Quantity of
quantity Loanable Funds
D = I + NCO sloping
- The interest rate in an open economy is determined by the
• r adjusts to balance supply and demand for loanable funds.
LF supply and demand - At the equilibrium interest rate, the amount that people want
in the LF market. to save exactly balances the amount that people want to
borrow for the purpose of buying domestic capital and
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foreign assets.
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III Foreign exchange market III Foreign exchange market

Goods and services
• What is the FX market?
–The foreign exchange market is the
Supply Demand market in which foreign currencies or
Sellers Buyers
foreign exchange are traded/ converted
2 nations • Why do we need to exchange one currency
Currencies Problems for another?
–To pay for goods and services activities
Which How
How do we – To make profit and speculations
calculate the
currency is currencies are
value of a
paid? transferred? currency?

III Foreign exchange market III Foreign exchange market

Characteristics Participants in FX markets
• Continuous operation (24/7) and geographical Buyer or seller of last
dispersion resort in the foreign
central
exchange markets
• Huge trading volume banks
• Exchange rates quoted on foreign exchange Clearinghouse for surpluses
and shortages between the brokers
markets are consistent with each other commercial banks
• The importance of countries in the world
Serve as the
economy will determine the position of their clearinghouses commercial banks
for currency
currencies. exchange
• The foreign exchange market is very sensitive to Those needing traditional users as tourists,
economic, political, social, and psychological currency to fund importers, exporters,
transactions investors, and so o n …
factors.…
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III Foreign exchange market III Foreign exchange market

1. Nominal exchange rate:
to transfer funds or purchasing power – is the price of one currency in terms of
from one nation and currency to another
another
Through electronic transfers and
Internet – E.g: an exchange rate of 23000 Vietnamese
FUNCTIONS the credit function Dong (VND) to the United States dollar (USD,
Credit is usually needed when goods are in
transit and also to allow the buyer some time $) means that 23000 VND is worth the same as
to resell the goods and make the payment (60
days or 90 days after sight)
1 USD.
to provide the facilities for hedging and
speculation Through financial instruments: spot,
forward,future, option and swap contracts

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ER – quotations ER – direct quotations

Direct quote
base currency (unit currency,transaction currency)
• 1 foreign currency unit = x home currency units (E)
E (VND/USD) = 23500  1 USD = 23500 VND
Indirect quote
• 1 home currency unit = x foreign currency units (e) quote currency (price currency,payment currency,term currency)

Direct quotation: E(VND/USD) = 23000

or indirect quotation: e(USD/VND) = 1/23000 The quote currency is thus the numerator in the ratio, and
the base currency is the denominator.
1
e= →E e
E
The value of the base currency (denominator) is always 1
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Appreciation & Depreciation Appreciation & Depreciation

• Appreciation (or “strengthening”)
– Increase in the value of a currency ER – direct quotation
as measured by the amount of If the foreign currency is
foreign currency it can buy strengthening, the
exchange rate number
if the exchange rate
number decreases, the
increases and the home
• Depreciation (or “weakening”) currency is depreciating
foreign currency is
weakening then the home
currency is strengthening
– Decrease in the value of a currency (i.e. appreciating)
as measured by the amount of
foreign currency it can buy
When E (VND/USD) rises, the dollar strengthens
and the dong looses its value

EXAMPLE 1: Appreciation or depreciation? EXAMPLE 2: Appreciation or depreciation?

Did the US dollar appreciate or depreciate? What is the exchange rate? Did the VND
A. Last year, Khalid exchanged $1 for 100 Japanese appreciate or depreciate?
yen, but this year he exchanged $1 for 105 A. Last year, Nam exchanged $1 for 22000 VND,
Japanese yen. but this year he exchanged $1 for 23000 VND.
B. Last year, Amira exchanged $1 for 25 Mexican B. Last year, Nam exchanged $1 for 25000 VND,
pesos, but this year she exchanged $1 for 20 but this year he exchanged $1 for 20000 VND.
Mexican pesos.

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III Foreign exchange market III Foreign exchange market

How to determine Supply and demand approach
nominal equilibrium exchange rate? • Supply for foreign currency ($) in
1. Purchasing Power Parity Theory the FX is driven by transactions E(VND/USD)
requiring foreign currency selling SUSD
2. Uncovered Interest Parity
through buying domestic currency.
3. A simple approach – supply and demand – Exports
analysis – Asset inflow (Invests or travels
into a country)
• Supply for foreign currency has
upward slope DUSD
– E(VND/USD) increases  VN’s QUSD
goods are relatively cheaper
than those of the US  Export
increases  supply of USD rises
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III Foreign exchange market III Foreign exchange market

Supply and demand approach Supply and demand approach
• Demand for foreign currency ($) in
FX is driven by transactions E(VND/USD) • The equilibrium E(VND/USD)
requiring foreign currency buying exchange rate occurs SUSD
Surplus
through selling domestic currency. at the intersection of
– Imports the supply and
– Asset flows abroad (Invests abroad Equilibrium
demand curve for exchange
or travels abroad)
foreign currency. rate
• Demand for foreign currency has
Shortage
downward slope DUSD DUSD
– E(VND/USD) increases  The US’s
goods are more relatively Equilibrium QUSD
QUSD quantity of
expensive than those of VN  foreign
Import decreases  demand of currency
USD falls
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Changes to equilibrium Changes to equilibrium

• Example 1 • Example 2
– Suppose that the supply – Suppose that the supply
E(VND/USD) E(VND/USD)
of $ falls due to a S2USD
of USD increases from an S1USD
increased desire to decrease in export. S1USD
S2USD
purchase V.N. goods. –E e E2
E1
–E e Since more VNDs are Equilibrium
E1
Equilibrium
E2 required to buy USD, the
Since fewer VNDs are
required to buy USD, the VND has weakened or
DUSD depreciated.
VND has strengthened or DUSD
QUSD
appreciated. QUSD

Factors that Influence Exchange Rates Factors that Influence Exchange Rates

Change in EX
• Factors which affect IM ↑ => D foreign currency ↑ => D curve for
EX ↑ => S foreign currency↑ => S curve for
the demand and E(VND/USD)
foreign currency shifts right => E ↓ foreign currency shifts right => E ↑
supply of foreign SUSD
currencies will impact
E(VND/ D1
on the equilibrium of USD)
D S E(VND/
D
S1 USD)
ER Equilibrium S
• What are they?
E0 E1
DUSD E1
E0
QUSD

Q0 Q 1 QUSD
Q0 Q 1 QUSD
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Factors that Influence Exchange Rates Factors that Influence Exchange Rates
Relative Inflation Rates Relative prices
Domestic interest rate Domestic interest rate
> Foreign interest rate < Foreign interest rate E(VND/ D1
USD) D S1
 Capital flows into  Capital flows out Domestic price > foreign price
S
 S foreign currency↑ => S curve for  D foreign currency ↑ => D curve for
foreign currency shifts right => E ↓ foreign currency shifts right => E ↑ E1
E(VND/ E(VND/
USD)
D1
D USD) D IM ↑ EX ↓
S
S1 S E0

E0 E1 DUSD ↑ SUSD ↓
E1 E0

E↑ Q 0 Q1 QUSD

QUSD
Q0 Q 1 Q0 Q 1 QUSD

HISTORY OF EXCHANGE RATE MECHANISM CHOICE HISTORY OF EXCHANGE RATE MECHANISM CHOICE

1. 1870-1914: The gold standard (a type of fixed exchange 3. 1947-1973:

rate regime) in which countries' currencies are pegged to Many countries apply a fixed currency peg to the USD (Bretton
gold. Woods System) with the US commitment to convert USD into gold
2. 1914-1946: (at the rate of 1 ounce of gold = 35 USD).
-During World War 1, many countries abandoned the gold The problem is:
standard because the limited gold supply prevented them • 1959: The supply of USD exceeds the amount of gold reserves
from printing more money to cover war expenses. held by the Fed for the first time
-In the late 1920s, some countries tried to restore the gold • 1971: The Fed's gold reserves continued to decline seriously
standard because its abolition caused instability in (due to the need to buy weapons used in the Vietnam War).
international trade relations, but this effort was unsuccessful • August 15, 1971: The US announced it would stop converting
due to the Great Depression in the late 1930s. The situation USD to gold. Industrialized countries switched to floating
lasted until the end of World War 2. exchange rates. The Bretton Woods system collapsed
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HISTORY OF EXCHANGE RATE MECHANISM CHOICE EXCHANGE RATE ARRANGEMENT 2011-2022

4. 1973-now: Classification of exchange rate regimes of the IMF

VIETNAM EXCHANGE RATE ARRANGEMENT Exchange rate mechanisms

Before 2016: VND was pegged to USD
 Floating exchange rate mechanism
From Jan 4th, 2016: VND was pegged
to a basket of currencies, including • Freely floating exchange rate mechanism
USD, EUR, JPY, CNY, SGD, THB, TWD,
KRW. • Managed floating exchange rate mechanism
The central exchange rate is
announced daily and commercial  Fixed exchange rate mechanism
banks decide the transaction rate with
customers within the +/-3% margin
prescribed from August 19, 2015.

From October 17, 2022: The State

Bank of Vietnam (SBV) decided to
adjust the USD/VND spot exchange
rate range from ±3% to ±5%.
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Floating exchange rate mechanism Fixed exchange rate mechanism

• Under floating exchange rate mechanism: • Under fixed exchange rate mechanism:
Exchange rate is determined by the supply and the central bank fixes its exchange rate by exchange
demand in the foreign exchange market. The Central
rate intervention – buying or selling foreign currency to
bank has no or little intervention in the market.
maintain the equilibrium of the market at the fixed
-Freely floating exchange rate mechanism: Exchange
exchange rate.
rate is completely determined by the market.
- If the market exchange rate is higher than the rate set
-Managed floating exchange rate mechanism: The
central bank allows the exchange rate to float within a by the Central Bank, the Central Bank will sell foreign

certain range and intervenes when the exchange rate currency (by buying domestic currency) to reduce the
fluctuates beyond the allowable range. exchange rate to the rate set by the Central Bank.

Fixed exchange rate mechanism Fixed exchange rate mechanism - example

EX increases => S foreign currency increases
• Under fixed exchange rate mechanism:  S curve of foreign currency shifts right
the central bank fixes its exchange rate by exchange  E tends to decrease
rate intervention – buying or selling foreign currency to E(VND
In order to fix exchange rate, the /USD)
D1
maintain the equilibrium of the market at the fixed D S
Central bank must buy foreign S1
exchange rate.
currency/sell domestic currency A
- If the market exchange rate is lower than the rate set E0 B
=> D foreign currency increases
by the Central Bank, the Central Bank will buy foreign
 D curve of foreign currency shifts
currency (by selling domestic currency) to raise the right
exchange rate to the level set by the Central Bank.  E unchanged Q0 Q1 QUSD
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Fixed exchange rate mechanism III Foreign exchange market

• Advantages: 2. Real exchange rate:
o Stable exchange rate makes trade and investment
easier
– Rate at which the goods and services of
o Allow government to achieve certain objectives such one country trade for the goods and
as trade balance, economic growth, external debt
services of another
• Disadvantages ∗
o Government intervention can be harmful for the =
economy (inflation, running out of foreign reserves) – Where
o Limitations on a Central bank’s actions • Pd = domestic price
o Fixed exchange rates can become unfixed when it is
• Pf = foreign price (in foreign currency)
largely deviated from long-run equilibrium exchange
rate, then it can create enormous monetary instability • R = real exchange rate
• E = nominal exchange rate (domestic
currency per unit of foreign currency)
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Real exchange rate Real exchange rate

You want to buy a pair of Adidas shoes and taking a search on internet... You want to buy a pair of Adidas shoes and taking a search on internet...
If exchange rate is 35.000 VND per USD, will you buy shoes in US or Vietnam?

∗ 35000 ∗ 85
= = = 1,19
2500000
1 pair of Adidas shoes in the USA = 1,19 ones in VN => Adidas in the US is
relatively more expensive than that in VN => Adidas in VN is highly
competitive
If exchange rate is 23.000 VND per USD, will you buy shoes in US or Vietnam?

∗ 23000 ∗ 85
= = = 0,782
Assume that there is no shipping cost, 2500000
1 pair of Adidas shoes in the USA = 0,782 one in VN => Adidas in the US is
relatively cheaper than that in VN => Highly competitive
If exchange rate is 35.000 VND per USD, will you buy shoes in US or Vietnam?
If exchange rate is 23.000 VND per USD, will you buy shoes in US or Vietnam?
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For the Economy as a Whole Real exchange rate (R) = E.Pf/Pd

• Real exchange rate A rise in real exchange rate A fall in real exchange rate
∗
=  Vietnam’s goods (domestic  Vietnam’s goods (domestic
goods) become cheaper goods) become more
= price of a foreign basket of goods relative to compared to foreign goods expensive compared to
price of a domestic basket of goods foreign goods
• Pd = domestic price level, e.g., Consumer  Consumers at home and  Consumers at home and
Price Index, measures the price of a basket of abroad buy more Vietnam’s abroad - buy fewer
goods and fewer goods Vietnam’s goods and more
goods
from other countries goods from other countries
• Pf = foreign price level  Higher exports, Lower  Lower exports, Higher
– Real exchange rate reflects a country's ability imports imports
 Higher net exports  Lower net exports
to compete with other countries' goods

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Impact of macroeconomic policy

Real exchange rate, NX and NCO on real exchange rate
 An increase in R makes domestic goods cheaper relative to • Fiscal policy:
foreigners’  Export increases  NX increases – Setting the level of government purchase (G)
 An increase in R has no effect on S or I, so it does not affect and taxation (T) by government policymakers
NCO (=S – I)  (S-I) curve is a vertical line.
– Classification:
Low R • Expansionary fiscal policy: An increase in G and/or
decrease in T
• Contractionary fiscal policy: A decrease in G
and/or increase in T
R1
R adjusts to
balance NX and NX (R)
NCO
High R
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Impact of macroeconomic policy Impact of macroeconomic policy

on real exchange rate on real exchange rate
• Domestic fiscal policy: • Foreign fiscal policy:
- The government increases G - The foreign government increases
or/and decreases T G or/and decreases T => Foreign S
Low R
e thấp
=> Government Saving decreases decreases => foreign interest rate Low R
=> S decreases R2
increases => domestic Investment
=> (S-I) falls, (S-I) curve shifts left decreases => (S-I) increases => R1

=> NCO decreases => Demand of (S-I) curve shifts right => NCO
R1
foreign currency decreases increases => Demand of foreign R2
NX
=> E decreases => R decreases (R) currency increases => E increases NX (R)
=> domestic goods become more High R => R increases => domestic goods
High R
expensive => NX decreases (NX1 become cheaper => NX increases
 NX2) (NX1  NX2)

Impact of macroeconomic policy Impact of macroeconomic policy

on real exchange rate on real exchange rate
• Policy to encourage domestic investment: • Trade policy:
- Domestic investment increases => (S-I) falls => (S-I) curve - Trade policy to restrain IM,
shifts left => NCO decreases => Demand of foreign currency increase EX => NX increases at
decreases => E decreases => R decreases => domestic goods every exchange rate => NX curve Low R
e thấp
become more expensive => NX decreases (NX1  NX2) shifts right => Supply of foreign
e thấp currency increases (meanwhile S R2
Low R
and I unchanged) => E decreases
=> R decreases => domestic goods R1
NX (R2)
R2
become more expensive => NX
NX (R1)
decreases (eliminate the initial
R1 increase of NX). Finally, NX remains High R

NX (R) constant (NX1), R decreases.

High R