Chapter 12

Chapter 12 - Kimberly Zhang Chapter 12 Mundell-Fleming...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
Kimberly Zhang Chapter 12 Mundell-Fleming model: open-economy version of the IS-LM model, short run o Assumes small open economy with perfect capital mobility o Assume economy operates with floating exchange rate (central bank allows exchange rate to adjust to changing economics conditions) o Y = C(Y – T) + I(r*) + G + NX(e) o Short run, so assumes that prices at home and abroad are fixed Real exchange rate is proportional to the nominal exchange rate When nominal exchange rate appreciates (from 100 to 200 yen per dollar), foreign goods become cheaper compared to domestic goods Fall in exports, rise in imports IS* curve summary: IS* slopes downward because higher exchange rate reduces net exports (Ch. 5); lower net exports shifts planned expenditure downward and reduces income (Keynesian cross) LM* curve o M/P = L(r*, Y) RHS = money demand, M fixed (controlled by central bank, P fixed because of short run Vertical because exchange rate does not enter into the LM* equation
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 3

Chapter 12 - Kimberly Zhang Chapter 12 Mundell-Fleming...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online