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Consider the Mundell-Fleming model we have discussed in class for the small open economy. Suppose that higher income implies higher imports and thus lower net
Consider the Mundell-Fleming model we have discussed in class for the small
open economy. Suppose that higher income implies higher imports and thus
lower net exports. That is, the net-exports function is
NX = NX(e,Y )
Examine the effects in a small open economy of a fiscal expansion on income
and the trade balance under the following exchange-rate regimes:
1. A floating exchange rate (5 points)
2. A fixed exchange rate (5 points)
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