 the ISLM model for an open economy. Dear students, we will talk about the ISLM model for an open economy. So only the IS curve is affected by having an open economy instead of closed economy. With reference to closed economy, if we look at it, the ISLM curve has only changed, there will be no change in the IS. In the ISLM curve, there will be no change in the FE line. Note that we don't use the aggregate demand and aggregate supply model because we need to know what happens to the real interest rate which has an important impact on the exchange rate. The equivalent of the ISLM model is the aggregate demand and aggregate supply model. In the same way, we get results. So we use the ISLM model instead of the aggregate demand and aggregate supply model because we want to see what changes will happen to the interest rate because the interest rate impacts the exchange rate. The IS curve is affected because net exports are part of the demand for goods. Why the IS curve will change in the open economy? Do you remember the IS curve? It was the equilibrium of goods market. So the demand and supply of goods market. So when we were in the closed economy of demand, there were three components of demand, for consumption purposes and for investment and for government spending, in the open economy, a further component will be added i.e. exports, i.e. foreigners also demand goods produced in our country. Through exports, so the IS curve will change in the open economy. The IS curve remains downward sloping. We will see that in the closed economy, the IS curve was downward sloping. It will remain downward sloping in the open economy. Any factor that shifts the closed economy IS curve, shifts the open economy IS curve in the same way. So the discussion of the closed economy about which factors shift the IS curve, all those factors will still shift the IS curve in the open economy. Factors that change net exports, given domestic output and domestic real interest rate, shift the IS curve. The additional factor that we will see in this, that every factor in which there is a change in net export, that too will be the reason for shifting the IS curve. Factors that increase net export, shift the IS curve up and to the right net export, that means that in exports, for example, the difference between exports and imports has increased. Our exports have increased. Obviously, I have told you that there is a demand of domestically produced goods. So, in addition to this, IS curve will shift up and to the right. Factors that decrease net export, shift the IS curve down and to the left. So the goods market is in equilibrium condition. In the closed market, you will remember that the equality of desired saving and desired investment was clear to the market. So, now since the third component has been added and net exports, this will be the equilibrium condition of the goods market. What does this mean? This means that the amount that domestic residents desire to land to foreigners, what is this on the left-hand side? Desired saving, minus desired investment. So, if this difference is auditory, this means that there are more savings in our country than the demand of it. People are saving more and investors are demand less. So, this excess saving, what will happen in the open economy? We will want this to be the landing of other countries. So, this amount, the amount that foreigners desire to borrow from domestic residents, if this difference is positive, then this is the amount that we want to land for the rest of the world. And what are net exports? If net exports are positive, what is the meaning of positive? That our exports are more and our imports are less. So, other countries are buying more from us and we are buying less from them. So, what will be the difference? Obviously, that difference, then they will borrow from us. So, to finance that difference. So, what will be the condition of equilibrium? That we want to land, the people of other countries want to borrow from us. It should be equal. This equation, if this value is of desired saving, whose value is y minus desired consumption minus government spending, then if you put this value, then you will get this equation that this simple equation is the same in which on the left hand side, this is the aggregate supply and on the right hand side, this is the aggregate demand. What are the components of demand? Condumption, investment, government spending and now the additional component is net exports. So, this means the supply of goods equals the demand for goods and is derived using the definition of national saving. So, open economy IS curve we want to draw, then we will draw this curve, the difference between desired saving and desired investment and on the other hand, we will draw the curve of net exports and then in the intersection this will determine the equilibrium. So, if you look at this diagram, this is a positively sloped curve. On the horizontal axis, you are taking the difference between desired saving and investment or net export and on the vertical axis, you are taking the domestic real interest rate. So, the difference between desired saving and desired investment is positively related with the interest rate. Why? Because, when the interest rate increases, we know that the savings will increase and the investment will decrease. So, this is the difference. And vice versa. And similarly, with the interest rate of net exports, there is a negative relationship. We have understood why there is a negative relationship. So, when the interest rate increases, then our financial and real assets are attractive for the foreigners. In their demand, in their demand, our currency is appreciated and as a result of appreciating, our net exports are reduced. So, there is a negative relationship. So, this is the equilibrium point. R1 is the interest rate on which the equilibrium condition holds. And you can also see that if the interest rate is very low, this is zero. This means that the value is negative and the value is positive. So, on a low interest rate, the difference between desired saving and investment is negative. And similarly, on a very high interest rate, your net exports are negative. So, net exports can be positive or negative. As I told you, if the net exports are very high, the curve of the net exports is negative. The net export curve slopes downward because the rise in the real interest rate increases the real exchange rate and reduces the net exports. Similarly, the difference between saving and investment is the upward sloping. So, because the rise in the real interest rate, I have explained to you that it will increase the desired national savings and reduce the investment. So, the equilibrium will be determined from the intersection. To see what happens when domestic output changes. So, this diagram tells us that this is the curve of saving and investment. One. And this is the curve of the net exports. And this is the intersection point. This means that R1 is the interest rate. This is the income level of Y1. If the income increases then Y2 is the interest rate. What will be the increase in the interest rate? The saving will increase. By increasing the saving, the curve will shift from 1 to 2. The rightward curve will shift. And when the income increases we saw that the net exports will decrease. The income will increase, the imports will increase. And the net exports will increase. So, the curve of S-I is the rightward curve. And the leftward curve of net exports is the intersection point. This is the intersection point. It shows that the interest rate will decrease. So, when you will link this with Y2 you will get a negatively slope die. When the income increases then the equilibrium condition of goods market will decrease. So, higher output increases the savings so, the S-I curve shifts to the right. Higher output reduces the net exports so, the next curve will shift to the left. Then equilibrium, near equilibrium point occurs at a lower real interest rate so, the highest curve is downward sloping. Thank you very much.