The Mundell-Fleming Model
Add a foreign sector to the IS/LM Model.
The Augmented IS/LM Diagram
The IS Curve
Let X denote exports, and let Z denote imports. Y = C + I + G + X - Z and Y = C + S + T.
For comparison: The IS Curve without foreign transactions.
The LM Curve
The BP Curve
A zero in the balance of payments. X - Z is the trade balance. F is the net capital inflow. X - Z + F = BOP, where BOP is balance of payments, which equals net official reserve transactions. X - Z + F = 0.
Getting Started with EconModel
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There are many variations on the analysis of the Mundell-Fleming Model. These include fixed vs. flexible exchange rates, high vs. low capital mobility, fiscal vs. monetary policy, etc.
The EconModel presentation allows you to interactively study all these cases.
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