FIGURE 12-1
The Mundell–Fleming Model on a Y–r Graph This presentation of the Mundell–Fleming model is similar to that of the closed-economy
IS–
LM model. In the small open economy, however, the position of the
IS curve depends on the exchange rate. The exchange rate adjusts to ensure that the
IS curve crosses the point where the
LM curve intersects the horizontal line that represents the world interest rate
r*.