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TEXAS STATE / Ecosystem Science and Policy / ECO 3315 / What is explained by the mondell-fleming model?

What is explained by the mondell-fleming model?

What is explained by the mondell-fleming model?

Description

School: Texas State University
Department: Ecosystem Science and Policy
Course: Intermediate Macroeconomics
Term: Fall 2018
Tags: Macroeconomics, IntermediateMacroeconomics, mundellfleming, IScurve, LMcurve, and moneymarkets
Cost: 25
Name: class notes on mundell fleming model
Description: mundell fleming model, the open economy, IS*-LM* curve
Uploaded: 11/12/2018
2 Pages 30 Views 1 Unlocks
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1 Study SOUT


What is mondell-fleming model?



Revisiting the Open Economy ° Mondell - Fleming Model

> assume a small open economy with perfect Capital mobility

free flow of economic resources

financial

where r * is the world interest rate

1

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IES

rrt => Capital inflows -> supply of loanable funds increases & back torki Also, the exchange rate is going to affect the flow of goods and services => NX = EX-IM -> Nlle)


What is the real exchange rate is?



Remember that the real exchange rate is an

E = e.pro

pt where the e = 8 pesos (foreign

nominal interest rate dollar I currency per In the short run, prices are fixed = Ene s

dollar / if et = dollar appreciates = EX V & IM 7 = NXT


What is flexible exchange rate regimes?



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1S*-LMT model (Mundell Fleming Model) Goods Market is*

Y = PE - C+ It (7 NX Y = C(Y-T) + 1 (r*) + G + Nyle) We also discuss several other topics like What is the difference between interference and diffraction?

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adjusts to bring the market in to

equilibrium Money market : LM*

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M = (M) S = (M)2 = L(r*,y) Deniving the shape of the IS* curve We also discuss several other topics like Does neuroscience really bear on the truth of theories of moral motivation?

Keynesian Cross

V = E

-PE=C+I+G+AK

if eq =>dollar appreciates

EXV & TMT NXV PE shifts down =) YV =) e 7 4 V -> IS"curve is downward If you want to learn more check out What is paranoid pd?

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Deriving the shape of the LM* curve

money market

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rark

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ER -----

DMLCrty)

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LM*

(real money balance

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Notice that y q = DM snitts right = p q => LM curve

is upward sloping

The LM* curve is anchored MY

at this equilibrium between LM &r=rt

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So if the LM curve shifts left, the LM* would have to shift left too so it can be in equilibrium.

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Example #1: IS-LM* model

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SLM

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y

LM*

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IS*

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Y-E

-PE=C+I+G+NY

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Flexible Exchange Rate Regimes

• The exchange rate is allowed to adjust accordingly to market forecast

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Flexible Exchange Rate Regime INITIAL CHANGE: 479

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LM

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r=r*

=

r2

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DM

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LM*

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if G9 = PE shifts up => 49 So for a given e, the higher y means that the 15* curve shifts

right 2

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IS*

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Y 2 = 10

Y=E

Since y 9 DM shifts right 2 =>r 1 = movement along LM curve However, the rh leads to Capital inflows => upward pressure one => dollar appreciates => et -> EX & IM1 => NX -> PE shifts down = 4 V =) movement along Is* curve

Since v => Dm shifts left = rt back to ro =) movement along

LM

PE,

10 pE = PE 2

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