Mundell-Fleming modeL explain please

[vicky_cool400]

Can someone plz explain THIS
Mundell-Fleming model ?
Also how to rememebr so many scenarios like fixe/flexible/high an low capital flows

 

[mehra1985]

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

 

[mehra1985]

Above is for High Capital Mobility scenario.

 

[ext]

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

 

[CMLSML]

^ good logic to remember by