Mundell-Fleming Model (Open Economy)

Question 1

Policy effectiveness under floating vs fixed exchange rates?

Answer 1

• Floating: monetary policy effective, fiscal weak.

Fixed: fiscal policy effective, monetary constrained

Question 2

What is the key feature of the Mundell-Fleming model?

Answer 2

Extension of IS-LM to open economy, includes BP (balance of payments) curve.

Question 3

What is capital mobility’s role?

Answer 3

High capital mobility flattens the BP curve → rapid capital flows respond to interest differentials.