If price expectations are assumed to be correct, money demand is proportional to income, and net capital flow is infinitely elastic, then the mother of all models in the Appendix to Chapter 14 corresponds to which of the following special cases?
A) classical closed economy
B) classical open economy
C) IS-LM model
D) Mundell-Fleming model with floating exchange rate

Question

Quizplus · Accepted Answer

The assumptions listed correspond to the classical open economy model, which is represented in the Appendix to Chapter 14 in macroeconomics textbooks. This model assumes that money demand is proportional to income, price expectations are correct, and net capital flow is infinitely elastic. It also assumes an open economy with free flow of goods, services, and capital, and flexible exchange rates.

If Price Expectations Are Assumed to Be Correct, Money Demand