Mundell Fleming model

Mundell Fleming model

1. Components of the Model

   • IS Curve (Equilibrium in the goods and services market)
     • - Relationship between output and interest rate in an open economy. -Higher government spending shifts the IS curve to the right.
   • LM Curve (Equilibrium in the monetary market)
     • Relationship between interest rate and money supply. An increase in the money supply shifts the LM curve to the right, reducing interest rates.
   • Balance of Payments Condition (BP = 0)
     • Considers the current account (exports minus imports) and the capital account (capital inflows and outflows). Capital mobility affects financial flows and exchange rate stability.

2. Fiscal and Monetary Policy