MGEB05H3 Lecture 9: Topic_9

(a) Use the Mundell-Fleming model of a Small Open Economy under Perfect Capital Mobility to illustrate the efficacy of fiscal and monetary policy under a fixed exchange rate regime and a flexible exchange rate regime. Explain how your conclusion may change if capital mobility is less perfect.

(b) Explain the expectations augmented Phillips curve. According to monetarists, the Phillips curve will hold up in the short term. What do they believe is the case in the long run? Be sure to explain and use diagrams to illustrate clearly.