In the Mundell-Fleming model, if the price level falls, then the equilibrium income _____ and the real exchange rate _____.
A)rises; appreciates
B)rises; depreciates
C)falls; appreciates
D)falls; depreciates

Question

Quizplus · Accepted Answer

In the Mundell-Fleming model, a fall in the price level increases the real money supply, which lowers interest rates and stimulates investment and income, leading to a rise in equilibrium income. The lower interest rates also cause the currency to depreciate, affecting the real exchange rate.

In the Mundell-Fleming Model, If the Price Level Falls, Then