If the short-run aggregate supply curve is assumed to be horizontal, international capital flows are infinitely elastic, and the nominal exchange rate is fixed, then the mother of all models in the Appendix to Chapter 14 corresponds to which of the following special cases?
A) classical open economy
B) IS-LM model
C) Mundell-Fleming model with floating exchange rate
D) Mundell-Fleming model with fixed exchange rate

Question

Quizplus · Accepted Answer

The model assumes a fixed exchange rate, which corresponds to the Mundell-Fleming model. The assumption of a horizontal short-run aggregate supply curve and infinitely elastic international capital flows are not unique to any specific model.

If the Short-Run Aggregate Supply Curve Is Assumed to Be