In a Mundell-Fleming model, discuss whether a situation where the current account is in continual deficit matched by a capital account surplus constitutes ‘external equilibrium’.

(b) What is exchange rate overshooting and why is it important? Draw implications of exchange rate overshooting for real exchange rate, income and the current account balance in the short run and long run.

(c) Briefly discuss efficiency wage models and hysteresis models of unemployment and how they explain unemployment in an economy. What are the main variations among the models?

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Step 1 explanation in turn can be see Sub model to the efficiency wagiel wage is seen by the workers ... View the full answer