Exam 13: The Open Economy Revisited: the Mundellfleming Model and the Exchange-Rate Regime

In a small open economy with a floating exchange rate, the supply of real money balances is fixed, and a rise in government spending:

Two small open economies, Fixed and Flex, can be described by the Mundell-Fleming model. The countries are otherwise identical except that Fixed maintains a fixed exchange rate, while Flex maintains a flexible exchange-rate regime. The governments of both countries increase spending by the same amount. Compare what happens in the two countries to: a.the exchange rate b.equilibrium output c.net exports.

Under a fixed-exchange-rate system, the central bank of a small open economy must:

If domestic prices are assumed to be endogenous in the Mundell-Fleming model, then a fall in government spending leads to:

In the Mundell-Fleming model with fixed exchange rates, the imposition of trade restrictions results in an increase in net exports because:

If a country chooses to have free capital flows and to conduct an independent monetary policy, then it must: