Intermediate Macroeconomics Lecture 15
Intermediate Macroeconomics Lecture 15
The open economy in the sr The Mundell-Fleming model Model under a floating ex-rate Model under a fixed ex-rate Interest-rate differentials Debate over floating V.s. fixed ex-rate Mundell-Fleming model with changing price level Model in large open economy
The Open Economy in the SR ◼ The Mundell-Fleming Model ◼ Model under a floating ex-rate ◼ Model under a fixed ex-rate ◼ Interest-rate differentials ◼ Debate over floating v.s. fixed ex-rate ◼ Mundell-Fleming model with changing price level ◼ Model in large open economy
The Mundell-Fleming model Robert A Mundell 1999 Nobel price in Economics a. Monetary fiscal policy under different ex-rate regimes b. Optimal currency area Other contribution a. Mundell-Tobin effect b. International trade
The Mundell-Fleming model ◼ Robert A. Mundell 1999 Nobel Price in Economics a. Monetary & fiscal policy under different ex-rate regimes b. Optimal currency area Other contribution: a. Mundell-Tobin effect b. International trade
The Mundell-Fleming model Crucial assumption soe >r=r Components of the model Y=C(Y-D+l(r)+G+ nX(e) M/P=L(, Y
The Mundell-Fleming Model ◼ Crucial assumption: SOE → r = r* ◼ Components of the model Y = C (Y-T) + I (r*) + G + NX (e) M/P=L (r, Y) r = r*
The Mundell-Fleming model 1. The model on a Y---r graph LM IS(e Y
The Mundell-Fleming Model 1. The model on a Y --- r graph r Y IS (e) LM r = r*
The Mundell-Fleming model Is curve and ex-rate (Is curve is drawn for a given ex-rate) EX-ratet> domestic currency. →M&EX(NX →| s shifts →Y
The Mundell-Fleming Model IS curve and ex-rate (IS curve is drawn for a given ex-rate) Ex-rate↑ → domestic currency____ → IM ___ & EX ___ (NX__) → IS shifts _____ → Y _____
The Mundell-Fleming model What if domestic> rk LM Is(e) Y
The Mundell-Fleming Model ◼ What if domestic r > r* r Y IS (e) LM r*
The Mundell-Fleming Model 2. The model on a Y---e graph 1) Goods market>IS* curve E=C(Y-D+l(r)+G+ NX(e)y=f E e1 E e2 NX(e) NX e1 2 Y1 Y2
The Mundell-Fleming Model 2. The model on a Y --- e graph 1) Goods market → IS* curve E = C (Y-T) + I (r*) + G + NX (e) e2 e2 E Y Y=E E e1 Y1 Y2 IS* e Y e1 NX e NX(e)
The Mundell-Fleming Model 2)Money market and LM curve M/P=L(rK, Y) LM
The Mundell-Fleming Model 2) Money market and LM* curve M/P=L (r*, Y) r Y Y LM e r* LM*
The Mundell-Fleming model 3)|S*&LM* LM Y
The Mundell-Fleming Model 3) IS* & LM* e Y IS* LM*
