Política fiscal expansiva, Mundell Fleming. T. C. Flexible | Cap. 19 - Macroeconomía

Expansionary Fiscal Policy in the Mundell-Fleming Model

Overview of the Mundell-Fleming Model

• The chapter introduces how expansionary fiscal policy operates within the Mundell-Fleming model, emphasizing a flexible exchange rate and imperfect capital mobility.

• The model integrates external factors into the IS-LM framework by adding a balance of payments equation, which includes both current and capital accounts.

Effects of Expansionary Fiscal Policy

• An increase in public spending leads to higher income levels (Y1) and rising interest rates (r1), shifting the IS curve to IS(2).

• The rise in income boosts imports, creating a current account deficit, while increased interest rates attract foreign capital, resulting in a surplus on the capital account.

Balance of Payments Dynamics

• If the balance of payments curve is elastic, surpluses in the capital account can outweigh deficits in the current account, leading to an overall surplus.

• High foreign investment demand appreciates local currency, raising exchange rates and making domestic products more expensive relative to foreign goods.

Adjustments Towards Equilibrium

• As net exports decline due to currency appreciation, both imports increase and income levels adjust downward. This results in another leftward shift of the IS curve.