Week 11 and 12 chapter notes

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Chapter 12 the open economy revisited: the mundell-fleming model and the exchange-rate regime notes. N mundell-fleming model the is-lm model for a small open economy. N y = c (y t) + i (r) + g + nx (e) 12. 2 the small open economy under floating exchange rates. Lm* central bank does not intervene in the foreign exchange market. 12. 3 the small open economy under fixed exchange rates. N fixed exchange rates an exchange rate that is set by the central bank"s willingness to buy and sell the domestic currency for foreign currencies at a predetermined price. N moreover, as long as the central bank stands ready to buy or sell foreign currency at the fixed exchange rate, the money supply adjusts automatically to the necessary level. Summary: the mundell-fleming model is the is-lm model for a small open economy. It takes the price level as given and then shows.

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