In the Mundell-Fleming model:
A)the exchange rate system must have a floating exchange rate.
B)the exchange rate system must have a fixed exchange rate.
C)it makes no difference whether the exchange rate system has a floating or a fixed exchange rate.
D)the behavior of the economy depends on whether the exchange rate system has a floating or a fixed exchange rate.

Question

Quizplus · Accepted Answer

The behavior of the economy in the Mundell-Fleming model depends on whether the exchange rate system has a floating or a fixed exchange rate. In a floating exchange rate system, the exchange rate is determined by market forces, while in a fixed exchange rate system, the exchange rate is fixed by the government or central bank. The effectiveness of monetary and fiscal policy in achieving domestic macroeconomic objectives is influenced by the exchange rate regime. In a floating exchange rate system, monetary policy can be used to achieve domestic objectives, while in a fixed exchange rate system, the government may need to use fiscal policy instead.

In the Mundell-Fleming Model