You are an economics policy maker. Your economy is running at less than full emp

Question

You are an economics policy maker. Your economy is running at less than full employment real income. You want to raise the level of income. Using the Mundell-Fleming model and graph(IS-LM) please answer the following:
Now go back to the ORIGINAL POSITION of a less than full employment real income. Suddenly, your economy faces a higher global interest rate.
According to the Mundell-Fleming model, explain in steps what happens in the model and to the level of the real exchange rate if you have flexible exchange rate?

Explanation / Answer

if Your economy is running at less than full employment real income. You want to raise the level of income. by Mundell-Fleming model and graph(IS-LM) by mundell- fleming model and IS-LM model if economy is running at less than full employment real income .if You want to raise the level of income then real money supply should be increased then M/P increase so L-M curve shifts rightwards causing rel income increasing. or it can be increased by shifting IS curve rightwards . this is done by increasing government expenditure in economy. Suddenly, if economy faces a higher global interest rate then money demand will decrease so this cause equilibrium level of income decrease. so income level further decreases. the level of the real exchange rate depends on price level if you have flexible exchange rate . if price level increase is more than interest rate then real exchange rate decreases or otherwise increases.

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