When conducting monetary and fiscal policy, policymakers often look be- yond their own country's borders Even if domestic prosperity is their sole ob jective, it is necessary for them to consider the rest of the world. The international flow of goods and services and the international flow of capital can affect an economy in profound ways. Policymakers ignore these effects at In this chapter we extend our analysis of aggregate demand to include inter- national trade and finance. The model developed in this chapter, called the Mundell-Fleming model, is an open-economy version of the IS-LM model. Both models stress the interaction between the goods market and the money market. Both models assume that the price level is fixed and then show what
