Assume that the price level is fixed in the short run, both at home and abroad. This means that the nominal exchange rate e equals the real exchange rate. Use the Mundell-Flemming model to predict what would happen to aggregate income and the exchange rate under both floating and fixed exchange rates in response to each of the following shocks.
a. A fall in consumer confidence about the future induces consumers to spend less and save more
b. The introduction of a stylish line of Toyotas makes some consumers prefer foreign cars over domestic cars.

  • CreatedAugust 26, 2013
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