Mundell-Fleming model•M-F model is extension of the IS/LM model•It can also called the IS/LM model in open economy•Here, imports and exchange rates additionally considered •For exchange rate they are in the form of demestic/ foreign •Another assumption is that inflation and its effect ignoredITF 220 Prof.J.Frankel
shiftsIs curve to right•Increase in govt. expenditure•Decrease in taxes•Increase in foregin income•Increase in exchange rateLM curve to right-Money supply(as price level assumed to be constant)ITF 220 Prof.J.Frankel
Perfect capital mobility •Situation when foregin interest rate= domestic interest rate initiallyAlso, it assumed that foreign interest rate rf is constantITF 220 Prof.J.Frankel
Flexible exchange rate•Increase in govt.spending •IS shifts right to IS1•Domestic interest rate incease in massive capital flow •To invest in US, people convert more dollar •Decrease exchange rate•Fall in exchange rate domestic goods expensive, export reduce, output falls to initial levelITF 220 Prof.J.Frankel
Fiscal policy•Assume that the govt. stimulates domestic spending by increasing by govt. purchases or by cutting taxes•Expansionary fiscal policy increase planned expenditures, it shift the IS* curve to right.