IS-LM model of BoP?

The ISLM-BOP model comprises three curves, each representing the equilibrium states of the broad components of the macroeconomy. The IS and LM curves represent the goods market and money market, respectively, and the BOP curve, the balance of payments, represents equilibrium in the foreign exchange market.

What is the difference between IS-LM model and Mundell-Fleming model?

The Mundell–Fleming model portrays the short-run relationship between an economy’s nominal exchange rate, interest rate, and output (in contrast to the closed-economy IS-LM model, which focuses only on the relationship between the interest rate and output).

What is fixed exchange rate in economics?

A fixed exchange rate is a regime applied by a government or central bank that ties the country’s official currency exchange rate to another country’s currency or the price of gold. The purpose of a fixed exchange rate system is to keep a currency’s value within a narrow band.

IS and LM analysis?

The IS stands for Investment and Savings. The LM stands for Liquidity and Money. On the vertical axis of the graph, ‘r’ represents the interest rate on government bonds. The IS-LM model attempts to explain a way to keep the economy in balance through an equilibrium of money supply versus interest rates.

What causes a shift in the IS-LM curve?

The LM curve, the equilibrium points in the market for money, shifts for two reasons: changes in money demand and changes in the money supply. If the money supply increases (decreases), ceteris paribus, the interest rate is lower (higher) at each level of Y, or in other words, the LM curve shifts right (left).

Why LM curve is vertical in Mundell-Fleming model?

The intersection of the two curves at the point A determines the equilibrium level of income Y0, which has no relation to e, shown on the vertical axis of Fig. 12.2(b). This is why the new (open economy) LM curve is vertical.

What is Mundell-Fleming exchange rate effect?

The Mundell-Fleming model shows that the effect of almost any economic policy on a small open economy depends on whether the exchange rate is floating or fixed. The Mundell-Fleming model shows that the power of monetary and fiscal policy to influence aggregate demand depends on the exchange rate regime.

What is fixed exchange rate with example?

Fixed exchange-rates are not permitted to fluctuate freely or respond to daily changes in demand and supply. The government fixes the exchange value of the currency. For example, the European Central Bank (ECB) may fix its exchange rate at €1 = $1 (assuming that the euro follows the fixed exchange-rate).

Who determines fixed exchange rate?

central bank
A fixed or pegged rate is determined by the government through its central bank. The rate is set against another major world currency (such as the U.S. dollar, euro, or yen). To maintain its exchange rate, the government will buy and sell its own currency against the currency to which it is pegged.