Mundell-Fleming

[JeffO15]

Question on how to look at Mundell-Fleming. When you have high cap mobility and an expansionary monetary policy it says interest rates drop, which I understand but it also says it reduces the inflow in physical and financial assets. Is this from the point of view of the country? Seems like it would be the other way around.

 

[Harrogath]

If interest rates fall, less foreign investors are willing to invest in the country, so the inflow of assets, specially financial assets, is reduced.

 

[Yayyywork]

Doesn’t it also depend on fiscal policy? I’ve noticed they ask a few questions like this in EOC but how can you pick without it taking about both monetary and fiscal policy? It is a 2x2 matrix after all

 

[S2000magician]

Broadly, Mundell-Fleming says that with high capital mobility, monetary policy outweighs fiscal policy, and with low capital mobility, fiscal policy outweighs monetary policy.