In the Mundell-Fleming model, the current account is not required to balance, neither in the short-run nor in the long-run equilibrium
Question
In the Mundell-Fleming model, the current account is not required to balance, neither in the short-run nor in the long-run equilibrium
Solution
The Mundell-Fleming model, also known as the IS-LM-BoP model, is a macroeconomic model that explains the relationship between interest rates and the exchange rate in the short-run. It is an extension of the IS-LM model, which was developed by the economists Robert Mundell and Marcus Fleming.
In the Mundell-Fleming model, the current account does not necessarily have to balance, neither in the short-run nor in the long-run equilibrium. This is because the model assumes that the economy is open, meaning that it trades goods, services, and assets with other countries.
In the short-run, the current account can be in deficit or surplus, depending on the country's trade balance and net income from abroad. If a country exports more than it imports, it will have a current account surplus. Conversely, if a country imports more than it exports
Similar Questions
The Mundell–Fleming model is a model of the:closed economy in the short run.open economy in the short run.closed economy in the long run.open economy in the long run.
The Mundell-Fleming model assumes that capital flows are: A. Perfectly mobile B. Completely restricted C. Influenced by interest rate differentials D. Independent of exchange rate fluctuations
The Mundell-Fleming model assumes that price levels are: A. Sticky in the short run and flexible in the long run B. Flexible in the short run and sticky in the long run C. Completely fixed in both the short and long run D. Independent of changes in output and employment
Which of the following statements about the Mundell-Fleming model is incorrect？A.Under a floating exchange rate regime, capital is fully mobile and expansionary fiscal spending reduces the country's net exports by an equivalent amount.B.If price level changes are allowed, the AD-AS model should be used to analyse the effectiveness of fiscal and monetary policies.C.Under a fixed exchange rate regime, capital is completely immobile and expansionary monetary policy leads to a drain on foreign exchange reserves.D.Under a fixed exchange rate regime, an expansion of fiscal policy leads to an increase in the money supply.
Select the statement which incorrectly explain the behavior of the economic impact under Mundell-Fleming Model.A.1. In a small open economy with fixed exchange rate, IS* and LM* curves will shift to right under expansionary fiscal policy and output is increased.B.1. In a small open economy with fixed exchange rate, monetary policy is ineffective while fiscal policy is effective.C.1. In a small open economy with floating exchange rate, monetary policy is effective while fiscal policy is ineffective.D.1. In a small open economy with floating exchange rate, IS* curve will shift to right under expansionary fiscal policy and output is increased.
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