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Assume an open economy with a flexible exchange rate in which there is perfect portfolio capital...

Assume an open economy with a flexible exchange rate in which there is perfect portfolio capital mobility so that the interest parity relation strictly holds. Using the Mundell-Fleming IS-LM model employed in lectures, explain the short-run effects of an expansionary monetary policy on the level of output, the exchange rate and the trade balance. Compare this outcome to that which would occur if instead an expansionary fiscal policy was implemented. Then briefly consider the effectiveness of an expansionary monetary policy under a fixed exchange rate.

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Rahul Sunny answered 2 years ago
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