Two Small Open Economies, Fixed and Flex, Can Be Described

question 102

Essay

Two small open economies, Fixed and Flex, can be described by the Mundell-Fleming model. The countries are otherwise identical except that Fixed maintains a fixed exchange rate, while Flex maintains a flexible exchange-rate regime. The governments of both countries increase spending by the same amount. Compare what happens in the two countries to:
a.the exchange rate
b.equilibrium output
c.net exports.

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Definitions:

Payment

The transfer of money or goods from one party to another in exchange for goods, services, or to fulfill a legal obligation.

Present Value

The contemporary valuation of future financial sums or sequences of cash flow, when factoring in a specific rate of return.

Interest Rate

The portion of a loan assessed as interest to the borrower, typically described as an annual rate of the loan's remaining balance.

Payment

The transfer of money, goods, or services in exchange for a product, service, or to fulfill an obligation.