Mundell fleming model and exchange rate regime Flashcards
What’s the difference between the IS-LM model and Mundell - Fleming model
IS LM is closed and MF assumes an open economy
In the MF model, the behaviour of the open economy depends on its:
Exchange rate system
Under MF, in a small open economy with perfect capital mobility, r = :
r*
What does r = r* mean?
- r = Domestic interest rate
- r* = world interest rate
In the MF model, what is e?
Nominal exchange rate
In a floating exchange rate system, e is allowed to:
Fluctuate in response to changing economic conditions
In a fixed exchange rate system, the central bank trades for foreing currency at:
A predetermined price
An increase in Y shifts IS to the:
Right
At any given value of e, a fiscal expansion increases:
Y
In a small open economy with perfect capital mobility, fiscal policy cannot effect:
Real GDP
What is crowding out in a closed economy?
Fiscal policy crowds out investment by causing r to rise
What is crowding out in a small open economy?
Fiscal policy crowds out net exports by causing the exchange rate to rise
An increase in M shifts LM to the:
Right
Why does LM rise when M increases?
Because Y must rise to restore equilibrium in the money market
Monetary policy affects output by affecting the components of:
aggregate demand
Expansionary monetary policy shifts demand from foreign to:
Domestic products
The increases in domestic income and employment due to ^ M come at the expense of:
Losses abroad
At any value of e, a tariff or quota reduces:
Imports
At any value of e, a tariff or quota increases:
NX
At any value of e, a tariff or quota shifts IS to the:
Right
Can import restrictions reduce a trade deficit?
No
When there is an import restriction, imports are reduced, but exports are reduced due to:
The appreciating exchange rate
In the Mundell-Fleming model, the central bank shifts the LM curve as required to keep:
e at its preannounced rate
To keep e from rising during fiscal expansion, the central bank must:
Sell domestic currency
Under floating rates, fiscal policy is __ at changing output
Ineffective
Under fixed rates, fiscal policy is __ __ at changing output
Very effective
An Increase in M would shift LM to the:
Right
Shifting LM to the right reduces:
e
Under floating rates, monetary policy is __ __ at changing output
Very effective
Under fixed rates, monetary policy __ be used to affect output
Cannot
A restriction on imports puts upwards pressure on:
e
To keep e from rising, the central bank must sell:
Domestic currency
Do import restrictions affect Y and NX?
- Yes under Fixed rates
- No under floating rates
What’s the argument for floating rates?
Allow monetary policy to be used to pursue other goals
What’s the argument for fixed rates?
Avoid uncertainty and volatility
Why does the AD curve have a negative slope?
Because ^ P means falling (M/P)
Fiscal policy affects income under fixed e but not under:
Floating e
