The 2 major policies under Mundell-Fleming Model

macro

我的想法

Like the IS-LM model ,we can also analyze the Mundell-Fleming Model problem in 2 kinds of policies, which are Fiscal Policy and Monetary Policy

The Fiscal Policy

The fiscal policy affects the $I{S}^{\ast }$ curve, for example, the expansionary fiscal policy would cause the $I{S}^{\ast }$ shifts to the right.

But we have to remind that, although the exchange rate would be higher, but since the $L{M}^{\ast }$ is vertical, see The relationship between Mundell-Fleming Model and LM curve the output would remain the same.

The Monetary Policy

A typical Monetary Policy example is when government choose to increase the Money supply, since the price level is fixed (see Sticky Price Assumption), and recall the function $M/P=L(r,Y)$ , the $L{M}^{\ast }$ would shifts to the right

---

Some thinking: the relationship between the exchange rate and the interest rate is the key issues to analyze these problems.

Reference