Use the Mundel Fleming model to compare and contrast the effects of an expansionary fiscal policy in a small open economy in the case of floating exchange rates and in the case of fixed exchange rates. Do this both for the short run, by framing your analysis in the IS-LM context, and for the long run, by using the AD-AS framework alongside the IS-LM one. [Hint:the Mundell Fleming model is given by: Y = C(Y– T) + I(r*) + G+ NX(e) IS*, M/P= L(r*, Y) LM*. eP where & = is the real exchange rate. P+ Remember that in the short run the price is assumed constant, however in the long run it is allowed to change. This implies that in the long run the real exchange rate can change even if the nominal exchange rate is fixed].

Use the Mundel Fleming model to compare and contrast the effects of an expansionary fiscal policy in a small open economy in the case of floating exchange rates and in the case of fixed exchange rates. Do this both for the short run, by framing your analysis in the IS-LM context, and for the long run, by using the AD-AS framework alongside the IS-LM one. [Hint:the Mundell Fleming model is given by: Y = C(Y– T) + I(r) + G+ NX(e) IS, M/P= L(r, Y) LM. eP where & = is the real exchange rate. P+ Remember that in the short run the price is assumed constant, however in the long run it is allowed to change. This implies that in the long run the real exchange rate can change even if the nominal exchange rate is fixed].

Macroeconomics: Private and Public Choice (MindTap Course List)

16th Edition

ISBN:9781305506756

Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Publisher:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Chapter19: International Finance And The Foreign Exchange Market

Section: Chapter Questions

Problem 1CQ

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