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Consider the Mundell-Fleming model we have discussed in class for the small

open economy. Suppose that higher income implies higher imports and thus

lower net exports. That is, the net-exports function is

NX = NX(e, Y )

Examine the effects in a small open economy of a fiscal expansion on income

and the trade balance under the following exchange-rate regimes:

1. A floating exchange rate (5 points)

2. A fixed exchange rate (5 points)

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