Mundell-Fleming modeL explain please

CFA Level II Economics
#1

Can someone plz explain THIS

Mundell-Fleming model ?

Also how to rememebr so many scenarios like fixe/flexible/high an low capital flows blush

#2

This is what I do:

Most important thing to note in Mundell Fleming Model is the assumption that the price level is constant, i.e. inflation is const.

Now consider:

Expansionary Monetary Policy: Interest Rates reduce --> Depreciation

Expansionary Fiscal Policy: 2 effects-

  1. Govt Spending Increase --> Interest Rates Increase --> Appreciation

  2. Growth Increase --> Inflation Increase --> Depreciation

Now our assumption said that inflation is constant… So we can cancel out point 2.

So, basically Expansionary/Expansionary Combination --> Depreciation + Appreciation --> Uncertain

Similarly, all the combinations can be derived if you cancel out the point 2 above.

I hope it doesn’t confuse you further…Lol

#3

Above is for High Capital Mobility scenario.

#4

High capital mobility = impact on what happens on interest rates

For example, expansionary monetary = increasing money supply (by lowering rates), if rates fall, currency will depreciate as people move money out … Expansionary fiscal = increasing borrowing = higher rates = currency appreciates = impact is not clear (as rates moved in different ways)

Low capital mobility = impact on trade flows , think of what happens to GDP… for example, expansionary fiscal or monetary policy = bank is trying to raise GDP = higher imports (as people have more money) and lower exports = currency depreciates (since there’s less foreign demand for domestic products)

I hope that helps

#5

^ good logic to remember by

#6

Good explanation.

#7

This whole economics is so theoretical that I don’t want to understand any logic. Just memorize tables and hope to never deal with them again.