The Mundell-Fleming model takes the world interest rate r as an exogenous variable. Letís consider what happens when this variable changes. (a) What might cause the world interest rate to rise? (b) In the Mundell-Fleming model with a áoating exchange rate, what happens to aggregate income, the exchange rate, and the trade balance in a small open economy when the world interest rate rises? (c) In the Mundell-Fleming model with a Öxed exchange rate, what happens to aggregate income, the exchange rate, and the trade balance in a small open economy when the world interest rate rises?

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Dickerson

Business

30 September, 12:14

The Mundell-Fleming model takes the world interest rate r as an exogenous variable. Letís consider what happens when this variable changes. (a) What might cause the world interest rate to rise? (b) In the Mundell-Fleming model with a áoating exchange rate, what happens to aggregate income, the exchange rate, and the trade balance in a small open economy when the world interest rate rises? (c) In the Mundell-Fleming model with a Öxed exchange rate, what happens to aggregate income, the exchange rate, and the trade balance in a small open economy when the world interest rate rises?

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Osvaldo Krause · Answer 1

a) The Mundell model yield the globe proportion r * as associate exogenous variable. Within the locked economy, the $64000 rate is set by the collaboration among convertible and asset. In undeveloped economy, the globe actual rate is set by the collaboration among world equivalent and world speculation. Rate can increase because of decline in saving and growth in asset. Within the short, the globe rate can rise because of growth within the demand for merchandise and facilities or due to decline in the pecuniary resource.

b)

In the Mundell model, beneath fluctuating interchange scheme, the curve moves to the leftward because of decline within the speculation. A decline within the speculation can result in rise in the interest proportions. The EM curve moves to the rightward because of decline within the cash demand. A decline within the cash demand can basis to extend in the interest proportions.

A growth within the interest proportions can source to associate extra provide of actual balance, once the provision of actual balance MP is fastened.

Thus, within the market, financial gain should rise. A rise within the financial gain can result in growth in the cash demand. A rise within the world interest proportions can result in growth in the capital flow. The rise in capital flow can result in decline the charge per unit. Thus, the trades, and productivity can rise.

c)

In the Mundell model, beneath fastened charge per unit, each IS and luminous flux unit curve moves to the leftward. As, IS curve moves to the leftward because of decline within the speculation demand. Moreover, LM curve moves to the leftward because of the decline within the charge per unit. Thus, the money provide can decrease