In this chapter, we present the Balance of Payments (BP) accounting and study the relationship of BP to the exchange rate and to basic macroeconomic magnitudes. Also, we define the concept of equilibrium in foreign transactions and examine the overall macroeconomic equilibrium in the open economy. The short-run effectiveness of fiscal and monetary policies is analyzed both in the context of the IS-LM model and in the context of the more realistic IS-MP model.
Kyrikos, D. (2015). The Open Economy [Chapter]. In Kyrikos, D. 2015. Macroeconomic Analysis and Policy [Undergraduate textbook]. Kallipos, Open Academic Editions. https://hdl.handle.net/11419/1569