CFA Level 2 (2020) – Economics: The Mundell-Fleming Model

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CFA Level 2
Topic: Economics
Reading: Currency Exchange Rates: Understanding Equilibrium Value

The Mundell–Fleming model describes how changes in monetary and fiscal policy affect interest rates and economic activity, which in turn leads to changes in capital and trade flows, eventually affecting the exchange rate.

A key is to establish whether capital mobility is high or low before we look at the combination of the fiscal & monetary policies (expansionary/restrictive).

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2 COMMENTS

  1. Thank you for this explanation. I guess, even though not mentioned, this case concerns an economy with a flexible exchange rate regime. What is the situation of a fixed exchange rate regime ?

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