Macroeconomics, 2nd Edition by Pearson

OPEN ECONOMY I: THE MUNDELL–FLEMING MODEL

311

is, therefore, downward sloping. The

FF

curve is drawn for a given exogenous

income

Y

. This is because the BP equilibrium requires higher interest rates

and a more favourable capital account to be

accompanied by a lower price of

foreign currency and a less competitive foreign trade sector, as reflected in a

deterioration in the current account. The

FF

curve thus slopes downwards for

a given income level. As income increases, the rise in import demand shifts

the

D

M

+

X

K

curve to the right in Figure 11.1, which results in a depreciation

of the currency. A given level of the ...