ECS3703
Assignment 2 Semester 1 2026
Unique number:
Due Date: 1 April 2026
QUESTION 1
(a)
Under a flexible exchange rate system, SADC countries that want to maintain both full
employment and a balanced current account must choose their macroeconomic policy
according to the degree of capital mobility. The Mundell Fleming framework shows that the
effectiveness of fiscal and monetary policy changes depending on whether capital is highly
mobile or not.
Perfect capital mobility
When there is perfect capital mobility, monetary policy is the most effective tool under
flexible exchange rates. If a country expands its money supply, domestic interest rates fall
below world interest rates.
DISCLAIMER & TERMS OF USE
Educational Aid: These study notes are intended to be used as educational resources and should not be seen as a
replacement for individual research, critical analysis, or professional consultation. Students are encouraged to perform
their own research and seek advice from their instructors or academic advisors for specific assignment guidelines.
Personal Responsibility: While every effort has been made to ensure the accuracy and reliability of the information in
these study notes, the seller does not guarantee the completeness or correctness of all content. The buyer is
responsible for verifying the accuracy of the information and exercising their own judgment when applying it to their
assignments.
Academic Integrity: It is essential for students to maintain academic integrity and follow their institution's policies
regarding plagiarism, citation, and referencing. These study notes should be used as learning tools and sources of
inspiration. Any direct reproduction of the content without proper citation and acknowledgment may be considered
academic misconduct.
Limited Liability: The seller shall not be liable for any direct or indirect damages, losses, or consequences arising from
the use of these notes. This includes, but is not limited to, poor academic performance, penalties, or any other negative
consequences resulting from the application or misuse of the information provided.
, For additional support +27 81 278 3372
QUESTION 1
(a)
Under a flexible exchange rate system, SADC countries that want to maintain both
full employment and a balanced current account must choose their macroeconomic
policy according to the degree of capital mobility. The Mundell Fleming framework
shows that the effectiveness of fiscal and monetary policy changes depending on
whether capital is highly mobile or not.
Perfect capital mobility
When there is perfect capital mobility, monetary policy is the most effective tool
under flexible exchange rates. If a country expands its money supply, domestic
interest rates fall below world interest rates. This causes capital outflows because
investors move funds to countries with higher returns. The local currency then
depreciates. A weaker currency makes exports cheaper and imports more
expensive, which improves net exports and raises aggregate demand, output, and
employment. In this case, monetary policy helps the country move toward full
employment, while the exchange rate adjustment helps correct external imbalance
and support a balanced current account (Salvatore, 2019).
Fiscal policy is less effective under perfect capital mobility. If government increases
spending or cuts taxes, income rises and interest rates tend to increase. This attracts
large capital inflows, causing the domestic currency to appreciate. Currency
appreciation reduces exports and increases imports, which offsets the expansionary
effect of fiscal policy. As a result, fiscal policy becomes weak under flexible
exchange rates with perfect capital mobility (Salvatore, 2019).
Imperfect capital mobility
When capital mobility is imperfect, both monetary and fiscal policy can have an
effect, but monetary policy still plays an important role under flexible exchange rates.
An expansionary monetary policy lowers interest rates, causes some capital outflow,
and leads to currency depreciation. Because capital is not perfectly mobile, the
capital outflow is smaller than under perfect mobility, but the depreciation still
improves net exports and increases output and employment. This makes monetary
Assignment 2 Semester 1 2026
Unique number:
Due Date: 1 April 2026
QUESTION 1
(a)
Under a flexible exchange rate system, SADC countries that want to maintain both full
employment and a balanced current account must choose their macroeconomic policy
according to the degree of capital mobility. The Mundell Fleming framework shows that the
effectiveness of fiscal and monetary policy changes depending on whether capital is highly
mobile or not.
Perfect capital mobility
When there is perfect capital mobility, monetary policy is the most effective tool under
flexible exchange rates. If a country expands its money supply, domestic interest rates fall
below world interest rates.
DISCLAIMER & TERMS OF USE
Educational Aid: These study notes are intended to be used as educational resources and should not be seen as a
replacement for individual research, critical analysis, or professional consultation. Students are encouraged to perform
their own research and seek advice from their instructors or academic advisors for specific assignment guidelines.
Personal Responsibility: While every effort has been made to ensure the accuracy and reliability of the information in
these study notes, the seller does not guarantee the completeness or correctness of all content. The buyer is
responsible for verifying the accuracy of the information and exercising their own judgment when applying it to their
assignments.
Academic Integrity: It is essential for students to maintain academic integrity and follow their institution's policies
regarding plagiarism, citation, and referencing. These study notes should be used as learning tools and sources of
inspiration. Any direct reproduction of the content without proper citation and acknowledgment may be considered
academic misconduct.
Limited Liability: The seller shall not be liable for any direct or indirect damages, losses, or consequences arising from
the use of these notes. This includes, but is not limited to, poor academic performance, penalties, or any other negative
consequences resulting from the application or misuse of the information provided.
, For additional support +27 81 278 3372
QUESTION 1
(a)
Under a flexible exchange rate system, SADC countries that want to maintain both
full employment and a balanced current account must choose their macroeconomic
policy according to the degree of capital mobility. The Mundell Fleming framework
shows that the effectiveness of fiscal and monetary policy changes depending on
whether capital is highly mobile or not.
Perfect capital mobility
When there is perfect capital mobility, monetary policy is the most effective tool
under flexible exchange rates. If a country expands its money supply, domestic
interest rates fall below world interest rates. This causes capital outflows because
investors move funds to countries with higher returns. The local currency then
depreciates. A weaker currency makes exports cheaper and imports more
expensive, which improves net exports and raises aggregate demand, output, and
employment. In this case, monetary policy helps the country move toward full
employment, while the exchange rate adjustment helps correct external imbalance
and support a balanced current account (Salvatore, 2019).
Fiscal policy is less effective under perfect capital mobility. If government increases
spending or cuts taxes, income rises and interest rates tend to increase. This attracts
large capital inflows, causing the domestic currency to appreciate. Currency
appreciation reduces exports and increases imports, which offsets the expansionary
effect of fiscal policy. As a result, fiscal policy becomes weak under flexible
exchange rates with perfect capital mobility (Salvatore, 2019).
Imperfect capital mobility
When capital mobility is imperfect, both monetary and fiscal policy can have an
effect, but monetary policy still plays an important role under flexible exchange rates.
An expansionary monetary policy lowers interest rates, causes some capital outflow,
and leads to currency depreciation. Because capital is not perfectly mobile, the
capital outflow is smaller than under perfect mobility, but the depreciation still
improves net exports and increases output and employment. This makes monetary
