OPEN ECONOMY I: THE MUNDELL–FLEMING MODEL
313
r
Y
Y
Q
R
E
Exchange Rate
Aggregate Income
Y
E
p
r
Y
Aggregate Income
Exchange Rate
NX
= 0
Aggregate Income
P
N
M
LM
(
M
0
)
BP
(
E
0
)
LM
(
M
1
)
BP
(
E
1
)
IS(
E
1
)
IS
(
E
0
)
r
1
Y
1
Y
0
Y
1
Y
0
E
1
E
1
Y
1
E
0
r
0
r
0
r
1
FF
(
Y
0
)
FF
(
Y
1
)
Interest Rate
Interest Rate
45˚
Figure 11.4
The Monetary Policy with Flexible
Exchange Rates.
The goods (
IS
),
money (
LM
), and foreign
exchange
(
BP
) markets are initially in
equilibrium at point P. An
increase
in the money supply shifts the
LM
curve to the right with ...
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