Mundell-Fleming Model

Macro

The background of the Mundell-Fleming Model is under the The Open Economy situation, which is also highly related to the IS-LM model. We can use it to analyze various policies.

In a Small Open Economy with perfect capital mobility, the domestic interest rate(该经济里的利率) ($r$) is decided by the world interest rate ($r^{\ast }$) , that is, $r=r^{\ast }$ where $r^{\ast }$ is exogenously fixed.

• Why the $r^{\ast }$ is exogenously fixed?

Because we are discussing in a Small Open Economy the $r$ is so small that can’t affect the $r^{\ast }$

If $r<r^{\ast }$, the Small Open Economy will experience Capital Outflow

If $r>r^{\ast }$, the Small Open Economy will experience Capital Inflow

When either one of these 2 cases happen, international capital flows are rapid enough to maintain: $r=r^{\ast }$

What about the exchange rate?

In the Mundell-Fleming Model, we analyze the problem in 2 situations:

1. The exchange rate is fixed.
2. The exchange rate is floating.

Also we have to focus on The relationship between Mundell-Fleming Model and IS curve and The relationship between Mundell-Fleming Model and LM curve

The 2 major policies under Mundell-Fleming Model