宏观经济学╱应用经济学研究生系列教材.ppt

China’s Currency Situation * Chapter Twelve * CHAPTER 12 The Open Economy Revisited: The Mundell-Fleming Model and the Exchange-rate Regime ? A PowerPoint?Tutorial To Accompany MACROECONOMICS, 7th. Edition N. Gregory Mankiw Tutorial written by: Mannig J. Simidian B.A. in Economics with Distinction, Duke University M.P.A., Harvard University Kennedy School of Government M.B.A., Massachusetts Institute of Technology (MIT) Sloan School of Management Introducing… e Income, output, Y LM* IS* Equilibrium exchange rate Equilibrium income This model is a close relative of the IS-LM model; both stress the interaction between the goods market and the money market. Price levels are fixed, and both show short-run fluctuations in aggregate income. The Mundell-Fleming Model assumes an open economy in which trade and finance are added; the IS-LM assumes a closed economy. This model, often described as “the dominant policy paradigm for studying open-economy monetary and fiscal policy,” makes one important and extreme assumption: the economy being studied is a small open economy and there is perfect capital mobility, meaning that it can borrow or lend as much as it wants in world financial markets, and therefore, the economy’s interest rate is controlled by the world interest rate, mathematically denoted as r = r*. One key lesson about this model is that the behavior of an economy depends on the exchange rate regime it adopts—floating or fixed. This model will help answer the question of which exchange rate regime should a nation adopt? Under a system of floating exchange rates, the exchange rate is set by market forces and is allowed to fluctuate in response to changing economic conditions. The exchange rate e, adjusts to achieve simultaneous equilibrium in the goods market and the money market. When something changes that equilibrium, the exchange rate is allowed to adjust to a new rate. Assumption 1: The domestic interest rate is equal to the world interest rate (r = r*