What is the Mundell-Flemming Model?

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Mundell Fleming model is extension of IS-LM model to open economy. It is based on the assumption of perfect capital mobility. Under Perfect capital mobility even slight differential between domestic interest rate and foreign interest rate generate infinite capital flow. As a result, external balance is attained when domestic interest rate is equal to world interest rate. As a result, Balance of payment function is horizontal corresponding to world interest rate.

Rahul Sunny answered 1 year ago

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