Advanced Macro & Growth · intermediate
What moves on the Mundell-Fleming diagram
Under floating rates, r < r* triggers depreciationdepreciationThe wearing out of capital over time, or, for currencies, a fall in value against others. that boosts net exports, monetary policymonetary policyCentral-bank control of interest rates or the money supply to steer inflation and output. is amplified.
Start on the BP line.
Easing pushes LM right, rates dip below r*.
Capital exits, the currency DEPRECIATES, exports boom: the exchange rateexchange rateThe price of one currency in terms of another. amplifies the stimulus. Floating rates make monetary policymonetary policyCentral-bank control of interest rates or the money supply to steer inflation and output. king.
Examiners ask this as: monetary floating depreciation, easing small open economy.
Other scenarios on Mundell-Fleming