lecture 9

Question 1

Mundell-Fleming model assumptions

Answer 1

fixed wages and prices in the SR, small home economy, perfect capital mobility and perfect asset substitutability

Question 2

features of the MF model

Answer 2

ISXM curve, home economy LM curve, the UIP condition curve (downwards sloping in interest-exchange rate space), the equilibrium condition for financial integration (when i = i* and eE is fulfilled)

Question 3

UIP condition

Answer 3

an equilibrium for financial integration. is characterised by home interest = world interest rate, and fulfilled exchange rate expectations

Question 4

monetary policy in fixed exchange rates

Answer 4

if money supply increases, LM shifts to right. As exchange rate is fixed, interest rate must be equal to world interest rate. Therefore equilibrium remains and monetary policy has no effect.

Question 5

monetary policy in flexible exchange rates

Answer 5

home interest falls and output rises. There is immediate depreciation of e to offset the interest rate differential. This leads to a rightwards shift of ISXM, home interest is below i*.