Mundell-Fleming model
1. (a) In the Mundell-Fleming model with floating exchange rates,
explain what happens to aggregate income, the exchange rate and the
trade balance when a quota on imported cars is removed.
In the Mundell–Fleming model under floating exchange rates, removing a
quota on imported cars shifts the net exports schedule inward, as shown
in Figure 3. As in the figure, for any given exchange rate, such as e, net
exports fall. This is because it now becomes possible for locals to buy
more Toyotas, Fords, and other foreign cars than they could when there
was a quota.
Figure 3
This inward shift in the net-exports schedule causes the IS* schedule to
shift inward as well, as shown in Figure 4.
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1. (a) In the Mundell-Fleming model with floating exchange rates,
explain what happens to aggregate income, the exchange rate and the
trade balance when a quota on imported cars is removed.
In the Mundell–Fleming model under floating exchange rates, removing a
quota on imported cars shifts the net exports schedule inward, as shown
in Figure 3. As in the figure, for any given exchange rate, such as e, net
exports fall. This is because it now becomes possible for locals to buy
more Toyotas, Fords, and other foreign cars than they could when there
was a quota.
Figure 3
This inward shift in the net-exports schedule causes the IS* schedule to
shift inward as well, as shown in Figure 4.
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