In the Mundell-Fleming model, the domestic interest rate is determined by the:
A) intersection of the LM and IS curves.
B) domestic rate of inflation.
C) world rate of inflation.
D) world interest rate.

Question

Quizplus · Accepted Answer

In the Mundell-Fleming model, the domestic interest rate is determined by the world interest rate, as it assumes capital mobility and perfect capital mobility. This is because with perfect capital mobility, any difference in interest rates between countries will lead to capital inflows or outflows until interest rates are equalized across countries. Therefore, the domestic interest rate in the Mundell-Fleming model is effectively determined by the world interest rate.

In the Mundell-Fleming Model, the Domestic Interest Rate Is Determined