OPEN ECONOMY I: THE MUNDELL–FLEMING MODEL
321
increase in the money supply can cause inflationary pressure to build up
over time, especially if the economy is close to the
Y
f
curve. Given the lags
in monetary policy, the increase in money supply tends to result in infla-
tion over a longer period of time. Thus, the achievement of BP equilibrium
comes at the cost of inflation.
4.
Capital controls—The imposition of capital controls results in a steeper
BP
curve. As the slope of the
BP
curve increases, say, a counterclockwise
rotation around point C, it can result in a curve that goes through point A
where there is no BP surplus. ...
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