Using the Mundell-Fleming Diagram Dealing with Internal Balance (IB) and External

question 9

Essay

Using the Mundell-Fleming diagram dealing with internal balance (IB) and external balance (EB), explain what is meant by effective policy instrument choice, being careful to identify clearly the critical elements of the diagram. Why is the EB curve postulated to be more interest-elastic than the IB curve? In what ways is the IS/LM/BP model preferable to the simple Mundell-Fleming diagram?

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Definitions:

Risky Assets

Assets that carry a significant possibility of loss along with the potential for higher rewards.

Money Market Mutual Funds

Investment funds that pool investors' money to purchase short-term, high-quality debt securities, offering liquidity and earning interest.

Check-Writing Privileges

The ability granted to an individual to write checks against an account, such as a money market account, that typically doesn't offer this feature.

Bank Checking Accounts

Banking services that allow individuals and businesses to deposit money and withdraw funds, typically through issuing checks or electronic transfers.