The Unassuming Economist

From The Conversation:

“Economists working on macroeconomic policy – things like taxes and spending, interest rates and border controls on flows of trade and money – often refer to a set of key relationships governments can influence. In the textbooks, each of those relationships is drawn as a curve in a graph.

First is the IS (“investment–saving”) curve. This says that if everything else stays the same, the Reserve Bank can increase economic output and employment by lowering the interest rate. Or it can cause a recession by raising the interest rate. (For simplicity’s sake, the curves here are depicted as straight lines.)

Second comes the Phillips Curve, which is usually drawn sloping upwards to suggest that if everything else stays the same, inflation will rise during economic booms and fall in recessions. In other words, the Reserve Bank or the government can apparently bring inflation down by causing a recession.”

Third comes the trade balance – the current account of the balance of payments (investment income and traded goods and services between New Zealand and the rest of the world).

If everything else stays the same here, as the exchange rate of the dollar falls, the current account strengthens by moving towards or expanding a surplus. If the exchange rate rises, the current account weakens: exports fall and imports increase.”

Continue reading here.