A monetary expansion in Europe has no real effects (see above), but expansionary US monetary policy (a rise in m*) constitutes a locomotive policy for Europe. This has been illustrated in Figure 11.13. The increase in the US money stock shifts GME -,-

down and LM*(AS'„',) to the left. The European real exchange rate appreciates and the interest rate falls. Both y and y* rise, and the US impulse thus stimulates both economies. By inflating the foreign price level, the real producer wage abroad falls.

y

Y=Y *

Figure 11.

Europe ano

.iis explains why fort..

*ion causes European ut there.

International symmetric two-cou..

rvious subsections can

-ion. Since we do not v.., zitroduced in the develop 4 summarized by rrk foreign output:

Y=Sr“g* , mere g and g* are inde

:ty in both count:

is real wage rigi 290 GM ER (gO, g1 *)

GM ER (go, g,*)

GM (go, g1 *)

GMEZ GME,; (go, go*)

United States GM ER 291 Chapter 11: The Open Economy Pe 4 ty in Europe tes i UM is at el . Both y and y*

former (see the third quad-

' N,'e policy since it ends up t.

and GME7„. In terms of

- ,'st is higher, there is a real kiucer wages in Europe rise.

cal expansion constitutes and higher unemployment above), but expansionary US

)olicy for Europe. This has

--loney stock shifts GME;cv range rate appreciates and pulse thus stimulates both

,ducer wage abroad falls.