This document provides an overview of economic policy under fixed exchange rates. It discusses Robert Mundell's influential Mundell-Fleming model, which shows how monetary and fiscal policy can be used to achieve internal and external balance. The model is presented graphically using IS, LM, and BP curves. An increase in government spending is used as an example of how these curves shift in response to fiscal policy under fixed exchange rates.

1. Chapter 25: Economic Policy in the Open Economy Fixed exchange rates

20. Money supply and demand Building the LM curve i i e Ms L=f(i) Money i 1 i 2 A . . . . . B’ B A’ q

22. Money supply and demand Building the LM curve i i 0 Ms L=f(Y 0 ,i) Money i 1 i 2 . . . L=f(Y 2 ,i) L=f(Y 1 ,i)

25. LM curve i i 0 Ms L=f(Y 0 ,i) Money i 1 i 2 L=f(Y 2 ,i) L=f(Y 1 ,i) Y i LM Y 1 i 1 i 2 i 0 Y 0 Y 2

44. BP curve i i i Y 0 BP Y Y 0 0 BP BP perfectly mobile capital imperfectly mobile capital perfectly immobile capital

59. Fiscal policy: graphical analysis IS IS’ IS’ IS IS’ IS IS’ IS BP LM’ LM’ LM LM LM’ LM LM’ LM i BP BP BP Y i i i Y Y Y

63. Monetary policy: graphical analysis IS IS IS IS BP LM’ LM’ LM LM LM’ LM LM’ LM i BP BP BP Y i i i Y Y Y

67. Devaluation: graphical analysis IS IS’ IS’ IS IS’ IS IS’ IS BP LM’ LM’ LM LM LM LM’ LM LM’ i BP BP BP Y i i i Y Y Y BP’ BP’ BP’ Y 0 Y 2 Y 0 Y 0 Y 0 i 2 Y 2 Y 2 Y 2