Chapter 9. The Mundell - Fleming Model
9.1 Section Title
Macro Models
Quiz
30
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The Mundell - Fleming Model
Question The Mundell - Fleming Model
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The IS* curve illustrates the relationship between output and the real exchange rate, and represents equilibrium in the goods market. A reduction in the real exchange rate will boost net exports and therefore increase output.
Question The Mundell - Fleming Model
v+I+5QpcbJ0ONRws6F9P4bA+WYgGxVlAUR+KAGc0631zm891imK/pckjxIs+iSmTWoi0ad/1of+gg4oPzrQ1n16Mg0nyi1ocBjtcgY7RjOUFRPEgg/iOzebP5F8k8a3iido7fUjKQpEdBX4kzJtmvfbBqpx4SuFei7t2PTSApqTUssGNh2VzHmsWc5NJvZAfX+dPy/HxSYSLWC7EOFYI5+XyotWHZ30Y6AJZ8reRtWIpc8ht2fdU8Nzm40ki0kJxiBSqocOXcHK7i/ID/Ui2QobW6IC+imCl4f6WtqVFDYh/maSSTrhct5tZuk4cXlqmKA9UXbeB4GPZBv/AlmLHhhiTgY7U029J64eGkffkdTi3GYH9khrthKltjZY3uLlGXOyldj/DT5yZMuKeIcvdWzFQ63nb8gUeWIfPuBKRrz3ZN//IISNldA==The LM* curve represents equilibrium in the money market. Money demand and money supply are not affected by changes in the real exchange rate so therefore the LM* curve is vertical.
Question The Mundell - Fleming Model
HXpLQpR8Docx3HxKYeqhyk7/jZQIXgOciQ4M6IuMqT7MIVhaq9FHCYw3cfUJa1/ca8bPhskRm9ZMdJfqsCDbL8T5n2xtBD9B/DBaqhIq3er1LaV3x5aPaoUIkANY8fh53cmOoHVmygZyV40iB05SVd7v1C40o0zBOzYSa5Sxo8kLKuF0UT0GnR4KoYO6uUYJb2dLyY40jBCmMYhdzSW7BaTmYDuBRKkreB7xhDCPFr6pOOtWUYOnr+cistdAbCepHJnU5f7HlEuYwNYR0G5kYmp9E7346+Pg+4+TN0/Ug7NPXyqTx1ijAeRTnyd5U5SOBlsb0y3+f2rvaBBkg/4VcZ5zhlIrzE4tXGKzwvCvb85usdHkupOnfx7BtZOeXNx8XC2PoIkoRSFrqtO2QSwC7rSKYWU=The increase in government spending will increase output and put upward pressure on the interest rate. The interest rate will be inclined to rise due to the reduction in national saving and the increase in money demand. To keep the interest rate fixed at the world rate there will be capital inflow and this will increase demand for the currency. The real exchange rate will rise.
Question The Mundell - Fleming Model
vCMM7qOF1Qv1mozOXEhiHs0v/QTPkEQu6Cpcgb4k4dfpALKa8ZVAAGpOtyOozBOctN6QVDPA5Jgym4cm4SwY8tPFclBoconG214ilITp/WmmZV2Y6WnszE7MrSRBD5rVuB7290qk20EbMwgHiMdrARxWUPijl1b/Q72LDuZeHxDaBWWu/JxUVIHdrrH1dJS4WXDYvpSyMKjCsPWxygSE4Tj4/sRqo+6AhUmwnrZovkpsDlJaohSVt/U5DMS176f3jofsvMXGLPF+YXEUyhMidgPPwvO+lTI99uoUgYbEmz7wY78MEUICYxduoNU8+nqHVsx50mFoYwAEVHXFePc017/JNyqFDOuGGovRyD75kQlVjtqQ9flSDg==The increase in income taxes will shift the IS* curve to the left. This will reduce spending and output in the economy. Interest rates will tend to fall and this will cause an outflow of funds. The real exchange rate will fall. To keep the real exchange rate fixed the money supply will have to fall to push the interest rate back to the world level and prevent the outflow of funds.