Topic 5 Flashcards
what is the Mundell/Fleming IS/LM/BP Model?
- Open macroeconomics model
- International trade and capital flows
(where BP=Balance of Payments) - Keynesian framework and assumptions
- Goods, money and foreign exchange markets
- Fixed and flexible exchange rates
- Effectiveness of monetary and fiscal policies
what is the balance of international payments?
A set of accounts showing all the economic transactions
between residents of one country and the rest of the
world.
what are receipts of FX (exports, sale of bonds, etc.) treated as?
a credit (+) item
what are the payments of FX (imports, purchase of foreign land, etc.) treated as?
a debit (-) item
the balance of international payments is usually divided into 2 subsections, what are they?
-current account
-capital (and financial) account
what does the current account record in the balance of payments?
recording all visible trade (eg. merchandise exports) and invisible trade (eg.
Services, investment income, transfers). The trade balance/deficit/surplus is part of the Current Account.
what does the Capital (and financial) account record?
recording all net flows of capital or assets (eg. purchase of Irish financial stocks, sale of foreign property).
how is the exchange rate between 2 currencies determined?
by market forces
are the central bank required to intervene on the FX market?
no
what is the market exchange rate determined by?
the demand for and supply of currency
IS/LM Model in the context of an open economy is what?
an exchange rate regime and perfect capital mobility (when investors can easily and quickly dispose of/acquire assets across borders, with no capital controls in place
what assumptions are there for the IS/LM/BP Mundell-Fleming Model?
-Prices (domestic and international) are constant
-Economy is not supply-constrained
- Y are determined by AD
- Perfect Capital Mobility
-Expansionary fiscal policy is financed by non-monetary
means
