What is the BP curve?
Definition. The bp curve, or balance of payments curve, represents the combinations of interest rates and output levels at which a country's balance of payments is in equilibrium.What does the BP curve show?
The BP curve depicts different combinations of income and interest rate that assure the balance of payment equilibrium. The points below the BP curve refer to the balance of payments deficit (e.g. an increase of income given constant interest rate will cause a fall in NX-CA).What shifts the BP curve to the left?
An increase in government spending leads to an incipient surplus in the balance of payments due to net capital inflows more than offsetting the current account deficit and, hence, appreciation of the currency. With the currency appreciation, the BP curve moves to the left.Is the LM and BP curve?
The IS curve represents the goods market equilibrium. The LM curve represents the money market equilibrium. The BP curve represents the balance of payments equilibrium. Macroeconomic equilibrium is achieved at the point where all the curves intersect.What determines the slope of a BP curve?
As higher Y tends to produce a current account deficit, and higher r tends to produce a capital account surplus, the BP curve is upward sloping. If international capital mobility is high, the BP curve is flatter than the LM curve.21. BP Curve
Why is the BP curve horizontal?
Under perfect capital mobility, the new BoP curve will be horizontal at the new world interest rate, so the equilibrium domestic interest rate will equal the world interest rate. If the global interest rate declines below the domestic rate, the opposite occurs.What is the Marshall Lerner condition?
In essence, the Marshall-Lerner Condition states that currency devaluation benefits the trade balance only if the demand for goods and services is responsive enough to changes in price.Is the LM curve for dummies?
The LM curve shows how money supply and demand balance at varying income levels and interest rates, with higher GDP increasing money demand and raising interest rates.Is LM BP what is BP?
This model integrates the goods market (IS), the money market (LM), and the balance of payments (BP) to illustrate how interest rates and output are determined in a global context, accounting for international trade and capital flows.What does the LM curve indicate?
LM (liquidity-money) curveThe LM curve shows the combinations of interest rates and levels of real income for which the money market is in equilibrium. It shows where money demand equals money supply. For the LM curve, the independent variable is income and the dependent variable is the interest rate.
What is Impossible Trinity in economics?
The Impossible Trinity, or Trilemma, is a core concept in international economics. It states that a country cannot achieve a fixed exchange rate, independent monetary policy, and free capital movement simultaneously.What happens when CRR is increased?
An increase in CRR equals lesser resources for banks, which may lead to a scarcity of funds. This can lead to a hike in interest rates as banks might need to work around lesser liquidity. A lower CRR can lead to lessening interest rates due to a higher availability of funds.What is a liquidity trap?
A liquidity trap may be defined as a situation in which conventional monetary policies have become impotent, because nominal interest rates are at or near zero: injecting monetary base into the economy has no effect, because [monetary] base and bonds are viewed by the private sector as perfect substitutes.What does the flow curve represent?
IS Curve. Aggregate Demand Equals National Product. Describing the real sector of the economy, the IS curve represents the condition that aggregate demand equals national product.What is the Phillips curve in economics?
Phillips's “curve” represented the average relationship between unemployment and wage behavior over the business cycle. It showed the rate of wage inflation that would result if a particular level of unemployment persisted for some time. Economists soon estimated Phillips curves for most developed economies.What is the Solow growth model?
The Solow Growth Model is an exogenous model of economic growth that analyzes changes in the level of output in an economy over time as a result of changes in the population growth rate, the savings rate, and the rate of technological progress.Does the UK meet the Marshall-Lerner condition?
Application of the Marshall-Lerner ConditionDuring the 1992 Sterling Crisis, the UK left the European Exchange Rate Mechanism (ERM), leading to a significant depreciation of the pound. Following this depreciation, the UK's trade balance improved, consistent with the Marshall-Lerner Condition.
What is the J-curve?
Key Takeaways. A J-curve depicts a trend that starts with a sharp drop and is followed by a dramatic rise. The trendline ends in an improvement from the starting point. In economics, the J-curve shows how a currency depreciation causes a severe worsening of a trade imbalance followed by a substantial improvement.What is the Mundell Fleming trilemma?
The Mundell-Fleming trilemma was developed in the 1960s, highlighting the complex relationship between exchange rates, capital flows, and monetary policy. The eurozone and the Bretton Woods Agreement serve as real-world examples of how countries navigate the trilemma's trade-offs.What is the purchasing power parity theory?
What is Purchasing Power Parity? Purchasing power parity (PPP) is a theory which states that exchange rates between currencies are in equilibrium when their purchasing power is the same in each of the two countries.What is the triffin dilemma?
Triffin's DilemmaIf the United States stopped running balance of payments deficits, the international community would lose its largest source of additions to reserves. The resulting shortage of liquidity could pull the world economy into a contractionary spiral, leading to instability.