OK, OK, anything to save Bill from reading Krugman. But I have to confess that I didn't understand his original question, perhaps because his diagram was gibberished in transmission. If the question is about the effects of a fall in Japanese net exports, you'd expect the yen to weaken given that it floats, as I think he notes. Further effects, including changes either way in the interest rate, are going to depend on the speeds and nature of adjustment of relative prices, incomes, and changes in the domestic financial system (from which it's impossible to separate out the role of the central bank). An excellent survey and typology of theories of international adjustment is: M. June Flanders (1989) _International Monetary Economics, 1870-1960: Between the Classical and the New Classical_ Cambridge Univ Pr A couple other starting points are Dornbusch's _Open-Economy Macroeconomics_. and Cohen's _Balance-of-Payments Policy_. The modern international PE literature is surveyed by Gilpin's _Political Economy of International Relations_. A nice older book is Kindleberger's _Power and Money_. Best, Colin PS I guess I missed the excessive discussion of Adam Smith that Mike Y complains about. While I've certainly learned a lot more from Marx than from Smith, I'm uncomfortable with the assertion that Smith has been "superseded" which seems to imply obsolescence. Political economy is not like physical science in the sense that we can write off older thinkers. And we'll get more out of Marx if we're less reverential toward him.
