The Mundell-Fleming Model

The Mundell-Fleming Model adds a balance of payments equilibrium condition (and a BP curve) to an IS-LM Model.   This extends the closed economy IS/LM framework to allow discussion of the interplay between monetary policy and exchange rate policy.  In particular, the model emphasizes the differences between fixed and floating exchange rates.

Movie:  Imperfect Capital Mobility, Fiscal Policy, Fixed Rates.
(83 seconds)

Having IS, LM, and BP curves that can intersect at one, two, or three points makes understanding the dynamics of the Mundell-Fleming Model a challenge.  This application guides you through the following steps.  By repeating the various possibilities, you will come to understand the model.

Model Link:  The Mundell-Fleming Model
 <activate the model links>
Printable PDF Exercises
 

1.  Determine capital mobility

  • Perfect Capital Mobility, Horizontal BP
  • Imperfect Capital Mobility, Shallow BP
  • Limited Capital Mobility, Steep BP  (steeper than LM)

2.  Find the equilibrium and draw the curves

3.  Pick a policy (choose one)

  • Money Supply
  • Government Spending
  • Foreign Income
  • Foreign Interest Rate

4.  Check the trade balance

5.  Final Equilibrium (choose one)

  • Solve Fixed Rate:  No Permanent BP Imbalance
  • Solve Flexible Rate

6.  Find the equilibrium and draw the curves

 

Classic Economic Models

    Contents

Macroeconomics

Introduction
    Overview of Macro Models

Models in Chronological Order
    The Classical Model
    The Simple Keynesian Model
    The Keynesian IS/LM Model
    The Mundell-Fleming Model
    Real Business Cycles
    The IS/MP Model
    The Solow Growth Model

Financial Markets
    Utility-Based Valuation of Risk
    Mean-Variance Analysis:
        Risk vs. Expected Return
    Fixed Income Securities:
        Mortgage/Bond Calculator
    Growth Investments:
        Present Value Calculator

Microeconomics

Introduction
    Overview of Micro Models

Supply and Demand
    Basic Supply and Demand
    Who Pays a Sales Tax?
    The Cobweb Model and
        Inventory-Based Pricing

Theory of the Firm
    Perfect Competition
    Monopoly and
        Monopolistic Competition
    Price Discrimination
    The Demand for Labor

Theory of the Consumer
    Two Goods - Two Prices
    Intertemporal Substitution
    Labor Supply, Income Taxes,
        and Transfer Payments

Resources