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Using the Mundell-Fleming model under flexible exchange rates and perfect capital mobility:
Using the
Mundell-Fleming model under flexible exchange rates and perfect capital mobility:
A. solve the model for the equilibrium level of income and the exchange rate, providing an algebraic solution for these endogenous variables as a function of the exogenous variables in the model.
B. With regards to the determinants of exchange rate changes, how does the Mundell-Fleming model and the monetary approach to exchange rates differ? Please explain using the algebraic results of part A, but also providing the economic differences in the two approaches to explaining exchange rate changes. B. What is the effect on the equilibrium level of income and the exchange rate of an exogenous
increase in the world interest rate. Illustrate graphically and algebraically
