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Economic contraction throughout the rest of the world reduces the world interest rate. Use the Mundell-Fleming model to illustrate graphically the impact of a decrease
Economic contraction throughout the rest of the world reduces the world interest rate. Use the Mundell-Fleming model to illustrate graphically the impact of a decrease in the world interest rate on the exchange rate (e), net export (NX) and the level of output(Y) in a small open economy with:(Be sure to label: the axes, the curves, the initial equilibrium levels, the direction the curves shift & the new short-run equilibrium.) A)a Floating- exchange-rate system B)a Fixed-exchange RS ) Level of Output (Y) and Net Exports (NX) 8.0 7.5 7.0 6.5 6.0 55 5.0 Impact of Decrease in World Interest Rate (Fixed Exchange Rate) 1S LM IS (After Shift) Fixed Exchange Rate 10.0 10.5 1.0 1.5 Exchange Rate 12.0 12.5 13.0 Impact of Decrease in World Interest Rate (Floating Exchange Rate) 18 15 13 10 Exchange Rate (e) 0 0 25 50 75 100 Output (Y) IS - IS' - LM E1
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