Macroeconomics | BBE | Lesson 19 | Mundell Fleming Model | Perfect Capital Mobility | Open Economy

Introduction to Mundell-Fleming Model, Open Economy IS LM Model, Aggregate Demand in the Open Economy, Capital Inflow, Capital Outflow, Perfect Capital Mobility
This lesson provides the introduction to the Mundell-Fleming Model. It is important for the 4th semester macroeconomics BBE students of Delhi University. It is relevant for other courses like BBA, Economics hons, for the graduation and post graduation level and for competitive exams like CUET Economics, IAS economics optional, Indian Economic Service and the NET JRF Economics aspirants.
International flow of goods and services and international flow of capital can affect the domestic economy in various ways. Thus, it is important to extend the analysis of aggregate demand and to include international trade and finance with the help of the Mundell-Fleming Model.
The Mundell-Fleming model is an open economy version of the IS-LM Model.
Both the models stress the interaction between the goods market and money market.
Both models assume that the price level is fixed, and then shows what causes short-run fluctuations in aggregate income.
The difference is that the IS-LM Model assumes a closed economy whereas the Mundell-Fleming Model assumes an open economy.
The Mundell-Fleming model assumes that it is a small open economy with perfect capital mobility, that is the economy can lend or borrow as much as it wants in world financial markets. Thus, the economy's interest rate is determined by the world interest rate.
1. If the Domestic Interest Rate is greater than the foreign interest rate, then this will lead to capital inflow till Domestic interest rate becomes equal to the foreign interest rate.
2. If the Domestic Interest Rate is less than the foreign interest rate, then this will lead to capital outflow till Domestic interest rate becomes equal to the foreign interest rate.
This assumption is important because once the interest rate is determined, the role of exchange rate can be completely analyzed.
Objectives of the Chapter:
1. How does the economy operate under a flexible exchange rate?
2. Whether a fixed exchange rate is better or a flexible exchange rate?
Hence the equation, domestic interest rate is equal to foreign interest rate represents the assumption that the international flow of capital is rapid enough to keep the domestic interest rate equal to the world interest rate.
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[@arshadsalamat5917]

Lecture with clarity and more understanding and comprehensive
Thanks mam

[@kanandaverma9033]

Thank you for thorough explanation Ma'am!

[@dr.triptisangwan]

Most welcome 😀

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Thank u mam please upload remaining lectures as soon as possible

[@dr.triptisangwan]

Sure

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maam please share the pdf of notes for all chapters as we have exam in 1 day

[@majidhussain2155]

Good one

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Thanks Ma’am

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Thank you so much ma'am

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Thank you ma'am❤

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Thank you Madam

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Welcome 🙏

[@rifatsultana0775]

Mam. Which book are you following?

[@jigmetstangais6825]

maam where can i get the pdf's of the lectures