Macroeconomics, 2nd Edition by Pearson

OPEN ECONOMY I: THE MUNDELL–FLEMING MODEL

315

is above the

BP

(

E

0

) curve at point M, there is a BP surplus. This is due to the

rise in the interest rate causing a capital inflow and a capital account

surplus

that is greater than the current account deficit due to the rise in imports

associated with a rise in income. The rightward shift of the

S

X

+

M

K

curve in

Figure 11.1 must be greater than the rightward shift of the

D

M

+

X

K

curve

resulting in an appreciation of the exchange rate.

The

FF

curve also shifts to the right as income has increased. The appre-

ciation of the exchange rate (

E

1



E

0

) makes ...