Mundell Fleming Model

Question 1

Similarities and differences between model and IS-LM

Answer 1

Both assume fixed price levels and show the causes of short run fluctuations in aggregate income
However IS-LM is closed and Mundell Fleming is open economy
States behaviour of economy depends on its ER system

Question 2

Question 3

Answer 3

Question 4

Question 5

Floating ER
Fixed ER

Answer 5

Floating - e is allowed to fluctuate in response to changing economic decisions
Fixed - central bank trades domestic for foreign currency at a predetermined price

Question 6

Fiscal Policy under Floating ER

Answer 6

Does not affect real GDP. Fiscal policy crowds out net exports by causing ER to appreciate

Question 7

Monetary Policy under Floating ER

Answer 7

Does not raise world AD but shifts demand from foreign to domestic products so increases in income and employment are at expense of losses abroad

Question 8

Monetary Policy under Floating ER

Answer 8

Does not raise world AD but shifts demand from foreign to domestic products so increases in income and employment are at expense of losses abroad

Question 9

Trade policy under floating ER

Answer 9

Import restrictions cannot reduce a trade deficit. Even though NX is unchanged there is less trade:
Trade restriction reduces imports
ER appreciation reduces exports
Less trade means fewer gains from trade
Import restrictions save jobs in domestic industries but destroy jobs in export producing industries hence fail to increase total employment

Question 10

Fixed ER

Answer 10

Question 11

Answer 11

Question 12

Fiscal policy under Fixed ER

Answer 12

Question 13

Monetary policy under Fixed ER

Answer 13

Question 14

Question 15

Trade policy under fixed ER

Answer 15

Question 16

Question 17

Floating vs Fixed ER

Answer 17

Floating - allow monetary policy to be used to pursue other goals (stable growth, low inflation)
Fixed - Avoid uncertainty & volatility making international transactions easier, prevents excessive money growth & hyperinflation

Question 18

Impossible trinity

Answer 18

Question 19