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Suppose that two small open economies, Fixed and Flex. The countries are otherwise identical except that Fixed maintains a fixed exchange rate, while Flex maintains
Suppose that two small open economies, Fixed and Flex. The countries are otherwise identical except that Fixed maintains a fixed exchange rate, while Flex maintains a flexible (floating) exchange-rate regime. Suppose that the central banks of both countries use expansionary monetary policy by buying bonds in financial markets at the same time. Compare what happens in the two countries to the exchange rate, equilibrium output and net exports. Use the Mundell-Fleming model to graphically illustrate and explain your answers.
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