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Mundell-Fleming Model

The Mundell-Fleming model explains the possibility of integrating various economies in the World regardless of the state of the economy. In this model, it is possible to link capital and financial markets, corporations, and banks among other business enterprises in different countries hence enabling linkage of returns. This model, therefore, has assumptions that have come in handy in developing the success application and execution of this model in various economies around the world.

Assumption and Application

  1. There is a fixed exchange rate: This model assumes a fixed exchange rate which usually hinders the central bank of any country from pursuing an independent policy on monetary matters. This has, therefore, promotes the tightening of the policy so as to elevate the interest rates in a given economy hence boosting economic growth and stability.
  2. Foreign investors are not likely to face political risk: The Mundell-Fleming model offers preferably the best morbidity of capital for the investors which usually allow foreign investors to their financial assets in any given country because there will be the generation of high returns thus event in case of political forces, the interest rates will not be influenced.
  3. Applicable in small open economy: This model usually assumes that a small economy does not have the ability to control the World nominal exchange rate as well as the interest rate. This, therefore, makes it applicable where the small economy can lend or borrow any amount in the World financial markets as it pleases since the outcome of this action will not affect the interest rate because the rates in the small economy are determined by the interest rates from the World. This is important in the development and growth of a small economy.