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Questions › DSE › DSE 2009 › Q51
2 marksInternational Economics › Open-economy macroeconomics › The Mundell-Fleming model: IS, LM and BPHardabout 4 min

DSE 2009 Question 51: Open-economy macroeconomics

An economy is described by a goods-market equilibrium Y=C(Y)+I(r)+G+NX(Y,e)Y=C(Y)+I(r)+G+NX(Y,e)Y=C(Y)+I(r)+G+NX(Y,e) and a money-market equilibrium M/P=L(Y,r)M/P=L(Y,r)M/P=L(Y,r), with C=Cˉ+σ(Y−T)C=\bar C+\sigma(Y-T)C=Cˉ+σ(Y−T), T=τYT=\tau YT=τY, I=Iˉ−δrI=\bar I-\delta rI=Iˉ−δr, NX=Xˉ−μY−γeNX=\bar X-\mu Y-\gamma eNX=Xˉ−μY−γe, L=Lˉ+αY−βrL=\bar L+\alpha Y-\beta rL=Lˉ+αY−βr, and r=rˉr=\bar rr=rˉ, M=MˉM=\bar MM=Mˉ, P=PˉP=\bar PP=Pˉ fixed. Drawing IS and LM in the (Y,e)(Y,e)(Y,e) plane with YYY horizontal and eee vertical. In this case

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An economy is described by a goods-market equilibrium Y=C(Y)+I(r)+G+NX(Y,e) and a money-market equilibrium M/P=L(Y,r), with C=C̄+σ(Y-T), T=τ Y, I=Ī-δ r, NX=X̄-μ Y-γ e, L=L̄+α Y-β r, and r=r̄, M=M̄, P=P̄ fixed. Drawing IS and LM in the (Y,e) plane with Y horizontal and e vertical. In this case (A) the IS curve is upward sloping and the LM curve is downward sloping (B) the IS curve is downward sloping and the LM curve is vertical (C) the IS curve is vertical and the LM curve is upward sloping (D) the IS curve is downward sloping and the LM curve is upward sloping

Also written as: An economy is described by a goods-market equilibrium Y=C(Y)+I(r)+G+NX(Y,e) and a money-market equilibrium M/P=L(Y,r), with C=C_bar+sigma(Y-T), T=tau Y, I=I_bar-delta r, NX=X_bar-mu Y-gamma e, L=L_bar+alpha Y-beta r, and r=r_bar, M=M_bar, P=P_bar fixed. Drawing IS and LM in the (Y,e) plane with Y horizontal and e vertical. In this case

Open-economy macroeconomics has come up 55 times in 7 exams since 2006.

What this question tests

This question is on The Mundell-Fleming model: IS, LM and BP, part of Open-economy macroeconomics in International Economics.

The open-economy extension of IS-LM with a balance-of-payments schedule.

TestStop has 12 past-paper questions on this subtopic; the nearest in year are below.

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Question from the DSE 2009 paper. Solutions are TestStop's own. Not affiliated with or endorsed by any examination authority.