What is the effect on the domestic economy of an increase in income from abroad?

Question

I have this as an economics tutorial question. I've already looked online and through all my textbooks and found nothing. I just need a few lines to explain this question:

Assume that the domestic country operates under a fixed exchange rate regime, and capital is completely mobile. Explain the effect on the domestic economy of an increase in foreign income, beginning from a point of general equilibrium, using the IS-LM-BOP framework.

Thanks!

Answer 1

Quickly...

IS shows the equilibrium in the goods market, where Injections (Investment, eXports..) = Leakages (Savings, iMports...). As interest rates rise, Investment falls and Income/Production falls, so IS slopes UP.

LM shows money market equilibrium. From equilibrium, if Income rises, Money demand rises, prompting interest rates to go up since Money Supply is unchanged. LM slopes Down.

BP is the Balance of Payments equilibrium. Under PERFECTLY mobile capital, it is flat at the world interest rates. If Domestic rates go up, there's massive inflow of capital immediately bringing interest rates on par with the rest of teh world.

Ok. Assume we start in equilibrium in all 3 markets, where all 3 curves cross.

Imagine an inflow of income from aboprad as an increase in exports. The effect if the same. In the IS world, as exports increase, at every level of interest rate, income rises. The IS curve shifts right.

We are now no longer in equilibrium in either the Money or BoP.

As interest rates tend to rise domestically to restore money market equilibrium. There's a huge inflow of capital.

However, the exchange rate regime is fixed, so the Central Bank has to buy up the foreign exchange and sell as much domestic currency as the foreign investors want. This causes the domestic money supply to increase, shifting the LM curve right.

Back to equilibrium at the original interest rate and with the FULL increase in income as shown by the horizontal IS shift.

Hope that helped.

Answer 2

The effect of inward flow of money from extenal sources is very complex.In the short run ,it creates demand and supply being in elastic,it may create inflation.If inward remittances are used in increasing productivity in industries,new industries etc,econmic growth and increase inemployment may result.In ward income may be either due providing service(outside employment),exports etc.If you study the experience of Kerala (India),where large inward remittance is found due to employment abroad,it has improved the standard of living of the people at the cost of inflation.It has turned the state in to a 'Consumer State" and production has dwindled.It has resulted in soaring real estate prices,high inflation,high urbanisation and decline of agriculture.

Answer 3

loose commerce is unrestricted commerce ie free of charge lists. The liberals declare that loose commerce reasons jobs to pass distant places. on an analogous time as the conservative "stance" is that we are in a international economic gadget and via attempting to keep the jobs by using protectionism does not relatively keep the jobs through fact the companies finally end up no longer being waiting to compete, ie everyday autos.

Answer 4

it increases