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Macroeconomics II
Trimester 3
- First, it develops the Mundell-Fleming open-economy IS-LM model for a small open economy with perfect capital mobility. The model is used to analyze the effects of fiscal, monetary, and trade policy under floating and flexible exchange rates.
- Then, the chapter explores interest rate differentials, or risk premia that arise due to country risk or expected changes in exchange rates. The Mundell-Fleming model is used to analyze the effects of a change in the risk premium. The 1994-95 Mexican Peso Crisis is an important real-world example of this.
- The chapter summarizes the debate over fixed vs. floating exchange rates.
- Following that discussion, the Mundell-Fleming model is used to derive the aggregate demand curve for a small open economy.
- And finally, the chapter discusses how the results it derives would be different in a large open economy.
- To reinforce this material, I strongly recommend you to read the provided text book.