Advanced Macro & Growth · intermediate
What moves on the Mundell-Fleming diagram
With mobile capital and floating rates, the appreciation from r > r* offsets fiscal stimulus through net exports.
Start on the BP line at the world rate.
Fiscal stimulus pushes IS right, domestic rates rise above r*.
Capital floods in, the currency appreciates, exports fall… IS gets pushed right back. Under floating rates, fiscal policyfiscal policyGovernment spending and tax decisions used to influence the macroeconomy. leaks abroad.
Examiners ask this as: fiscal floating exchange, crowding out currency.
Other scenarios on Mundell-Fleming