Mundell-Fleming Model: Analyzing Open Economy Dynamics

ECON 311-02 Homework 8 Fall 2023 Chapter 13: The Open Economy Revisited: The Mundell–Fleming Model and the Exchange-Rate Regime Examples are based on Chapter 13 of the textbook 13-1 The Mundell–Fleming Model 13-2 The Small Open Economy Under Floating Exchange Rates 13-3 The Small Open Economy Under Fixed Exchange Rates 13-4 Interest Rate Differentials 13-5 Should Exchange Rates Be Floating or Fixed? 13-6 From the Short Run to the Long Run: The M–F Model with a Changing Price Level 13-7 Conclusion: A Short-Run Model of the Large Open Economy 1. Suppose the government stimulates domestic spending by increasing government pur- chases or cutting taxes. Use the Mundell-Fleming model with floating exchange rates to illustrate and explain the effects this has in a small open economy. 2. Suppose now the central bank increases the money supply. Use the Mundell-Fleming model with floating exchange rates to illustrate and explain the effects this has in a small open economy. 1

ECON 311-02 Fall 2023 Chapter 13: The Open Economy Revisited: The Mundell–Fleming Model and the Exchange-Rate Regime 3. Suppose the government reduces the demand for imported goods by imposing an import quota or a tariff. What happens to aggregate income and the exchange rate? How does the economy reach its new equilibrium? Use the Mundell-Fleming model with floating exchange rates to illustrate and explain . 4. Suppose the government stimulates domestic spending by increasing government pur- chases or cutting taxes. Use the Mundell-Fleming model to illustrate and explain how this policy affects a small open economy with a fixed exchange rate. 2

ECON 311-02 Fall 2023 Chapter 13: The Open Economy Revisited: The Mundell–Fleming Model and the Exchange-Rate Regime 5. Suppose the government reduces imports by imposing an import quota or a tariff. Use the Mundell-Fleming model to illustrate and explain how this policy affects a small open economy with a fixed exchange rate. 6. The United States is a large open economy. In such an economy, use the Mundell-Fleming model to illustrate and explain the effects of an increase in government purchases or a cut in taxes on the real interest rate, the net capital outflow, the exchange rate, and the trade balance. 3

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ECON 311-02 Fall 2023 Chapter 13: The Open Economy Revisited: The Mundell–Fleming Model and the Exchange-Rate Regime 7. The United States is a large open economy. In such an economy, use the Mundell-Fleming model to illustrate and explain the effects of an increase in the money supply on the real interest rate, the net capital outflow, the exchange rate, and the trade balance. Chapter 17: Government Debt and Budget Deficits Examples are based on Chapter 17 of the textbook 17-1 The Size of the Government Debt 17-2 Measurement Problems 17-3 The Traditional View of Government Debt 17-4 The Ricardian View of Government Debt 17-5 Other Perspectives of Government Debt 8. Compare the traditional view versus the view of Ricardian equivalence of the effects of a debt-financed tax cut on: a. national saving. b. current consumption. c. the real interest rate. 4

ECON 311-02 Fall 2023 Chapter 13: The Open Economy Revisited: The Mundell–Fleming Model and the Exchange-Rate Regime 9. Give at least three reasons why Ricardian equivalence might not correctly describe an economy. 5

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