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Derive and explain the key features of the flexible price monetary model. What, in your opinion,...

Derive and explain the key features of the flexible price monetary model. What, in your opinion, are its strengths and weaknesses?

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Flexible price monetary model developed by Frenkel assumes prices are flexible.The supply curve is always vertical and there will be no effect on output with shift in demand.Output level is determined by the factors of supply and so output level cannot be adjusted up and down.Using the monetary model the effects on foreign exchange are determined.In order to bring stability of exchange rate and price the use of monetary and  fiscal policy are suggested by the government.Equilibrium is assumed in the monetary model.It also assumes capital is mobile, purchasing power parity will always hold .All prices including wages are flexible.

Nations ae protected from unexpected foreign economic changes by flexible exchange rate.Excellent capital mobility and stable foreign and domestic demand function for money are its merit. However there will be depreciation of domestic currency.This is because with increase in domestic interest there  will be decrease in the demand for domestic money..

Rahul Sunny answered 8 months ago
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