Advanced Macro & Growth · advanced
What moves on the Mundell-Fleming diagram
A higher world rate forces adjustment on any open economy: capital flows until domestic returns match r*.
Your economy is anchored to the world rate line.
The global anchor moves UP, suddenly domestic rates sit below it.
Capital drains out until domestic conditions adjust. Small economies import the Fed's policy whether they like it or not.
Examiners ask this as: world interest rate rises, fed spillover emerging.
Other scenarios on Mundell-Fleming