1 Study SOUT
Revisiting the Open Economy ° Mondell - Fleming Model
> assume a small open economy with perfect Capital mobility
free flow of economic resources
where r * is the world interest rate
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)
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
Don't forget about the age old question of Which organization used to influence a staff to exert effort to achea a goal?
If you want to learn more check out What are the two types of shorelines?
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?
adjusts to bring the market in to
equilibrium Money market : LM*
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?
V = E
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?
NX bat e
it yo Don't forget about the age old question of What is the difference between brands and grades?
Deriving the shape of the LM* curve
(real money balance
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
So if the LM curve shifts left, the LM* would have to shift left too so it can be in equilibrium.
Example #1: IS-LM* model
() Study Soup
Flexible Exchange Rate Regimes
• The exchange rate is allowed to adjust accordingly to market forecast
Flexible Exchange Rate Regime INITIAL CHANGE: 479
if G9 = PE shifts up => 49 So for a given e, the higher y means that the 15* curve shifts
Y 2 = 10
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
10 pE = PE 2
Y2 - Y