N Gregory Mankiw 2016 Macroeconomics_9th_Ed-2

What is the key difference between the IS-LM model and the Mundell-Fleming model?

The IS-LM model assumes a closed economy while the Mundell-Fleming model assumes an open economy.

What does the Mundell-Fleming model assume about the economy being studied?

It assumes that the economy is a small open economy with perfect capital mobility.

What is the equation for equilibrium in the goods market represented in the Mundell-Fleming model?

Y = C(Y - T) + I(r*) + G + NX(e).

Under the Mundell-Fleming model, how does a rise in the exchange rate impact net exports?

A rise in the exchange rate reduces net exports.

If a government increases the money supply, what is the immediate effect on income according to the Mundell-Fleming model under floating exchange rates?

The income increases because the LM* curve shifts to the right.

What happens to aggregate income and the exchange rate when fiscal policy expands in a small open economy under floating exchange rates?

Aggregate income remains unchanged; exchange rate appreciates.

What defines perfect capital mobility in the context of the Mundell-Fleming model?

What is the impact of a trade restriction on income and exchange rates under fixed exchange rates?

It raises the exchange rate but does not affect income.

How does monetary policy function under fixed exchange rates?

Monetary policy becomes ineffectual as the money supply must adjust to maintain the fixed exchange rate.

What does the term 'impossible trinity' refer to in international finance?

It is impossible for a nation to have free capital flows, a fixed exchange rate, and independent monetary policy.

What is the result of an increase in a country's risk premium on its economy according to the Mundell-Fleming model?

It leads to a rise in interest rates, a leftward shift in the IS* curve, and a depreciation of the currency.

What were the implications of the Mundell-Fleming model during the Great Depression regarding currency devaluation?

Countries that devalued their currencies recovered more quickly from the depression.

How does the Mundell-Fleming model relate to trade policy in terms of net exports?

A trade restriction generally shifts the net export schedule to the right, increasing planned expenditure.

What is meant by the term 'small open economy' within the Mundell-Fleming framework?

An economy that can borrow or lend in world financial markets without affecting the world interest rate.

How are income Y and exchange rate e determined in the Mundell-Fleming model?

They are determined by the intersection of the IS* and LM* curves.

Define floating exchange rates as per the Mundell-Fleming model.

A system where the exchange rate is set by market forces and fluctuates according to economic conditions.

What is one crucial assumption about price levels in the Mundell-Fleming model?

The price levels are assumed to be fixed in the short run.

What happens to income in a small open economy during a fiscal expansion under fixed exchange rates?

Income increases as the LM* curve shifts right to accommodate the expansion.

How does the Mundell-Fleming model summarize the effects of exchange policies on aggregate demand?

It relates the income and exchange rate dynamics to shifts in IS* and LM* curves due to fiscal and monetary policies.

What effect does a monetary contraction have on a small open economy according to the Mundell-Fleming model?

It raises the exchange rate, lowers net exports, and subsequently lowers aggregate income.

Summarize the effect of a fiscal expansion under floating exchange rates in the Mundell-Fleming model.

The fiscal expansion shifts the IS* curve right, appreciates the currency, and has no effect on aggregate income.