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11 Dec 2019

Consider a small open economy that currently operates under a floating exchange rate system. Suppose the central bank of the economy decides to decrease the money supply. Using the Mundell-Fleming model, show the short run effect this has on the economy.

Use a table to compare the results of a decrease in money supply on domestic interest rate, equilibrium level of income and exchange rate in the Mundell-Fleming model with a floating exchange rate with the IS-LM model.

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