ScienceGuy

Is government debt a problem? There are two parts to a question of government debt: 

EXPECTATIONS IN AS -  INFLATION We have already incorporated expectations of the price level into the model.

As we had seen, in the short and medium run fluctuations (shocks and policy changes) dominate. In the long-run capital accumulation and technological change dominates.

The openness of the economy has three distinct dimensions: 1. Openness in the goods market: Free trade restrictions include tariffs and quotas.

In the short run,  we had assumed that the expectations of prices are fixed in the short run but not in the medium run. In the short run price expectations can be wrong, in the medium run they cannot.

In the dynamic AD-AS model, we remove the assumption that the inflation rate, the expectation for the inflation rate and output growth are zero in the medium run. Additionally, we had assumed that there is no growth in the medium run.

Historically, one of the main reasons countries have borrowed abroad is to finance productive investments that would have been hard to finance out of domestic savings alone.

Intertemporal trade and Current Account balances (Model Without Investment)

Endgame: Was it really Avenged? A Quantum Mechanical perspective “All we can do is our best and sometimes the best we can do is to start over” - Peggy Carter

In this model, the government has its objective to minimize the loss function given by,

A currency crisis is a type of financial crisis. It is a situation when there is serious doubt if the central banks have enough foreign exchange reserves to maintain the peg of the currency.

With increased world integration there was a need to study the transmission of policy in one part of the world to other country's.

Unlike Mundel Flemming model, this model introduces dynamics. Further, it takes the role of expectations into account. Dornbusch's model was highly influential because, at the time of writing, the world had recently shifted to a floating exchange rate regime and a little was understood about exchange rate volatilities.

The monetary model is better for a long run explanation of exchange rates. It assumes full employment with flexible prices. Furthermore, real income can be exogenously decided which determine the demand for real balances.

For Floating Exchange Rates Assumptions:  1. AS curve is vertical. Therefore, the long run determinants only effect the output. Further, prices are flexible (another long run phenomenon).