What is Mundell-Fleming model and its limitation?

What is Mundell-Fleming model and its limitation?

Several other shortcomings of the Mundell-Fleming model have also been emphasized. In particular, the model is completely static and therefore not able to address issues related to the long run, as well as to the transitional dynamics of private wealth and government finance.

What does the Marshall Lerner condition represent?

Marshall Lerner condition : This refers to the proposition that the devaluation of a country’s currency will lead to an improvement in its balance of trade with the rest of the world only if the sum of the price elasticities of its exports and imports is greater than one.

IS-LM a equation?

Note that both relationships are combinations of interest rates and output. Solving these two equations jointly determines the equilibrium. Algebraically, we have an equation for the LM curve: r = (1/L 2) [L 0 + L 1Y – M/P].

IS curve a formula?

The name “IS curve” derives from the property that it represents that desired investment equals desired saving. i(r)=[y−t −c(y)] + (t −g). The left-hand side is desired investment.

What is Marshall Lerner equation?

The Marshall Lerner condition is satisfied for India as εm + εX = 1.03 + 0.54 = 1.57 is greater than one. A 1% depreciation in the real exchange rate causes a 1.03% rise in imports and a 0.54% rise in exports.

What happens if Marshall-Lerner condition does not hold?

As the Marshall-Lerner condition does not hold, a devaluation of domestic currency will decrease the BOT and therefore worsen the BOP.

What is Keynesian cross model?

The expenditure-output model, sometimes also called the Keynesian cross diagram, determines the equilibrium level of real GDP by the point where the total or aggregate expenditures in the economy are equal to the amount of output produced.

How do you calculate LM?

Algebraically, we have an equation for the LM curve: r = (1/L 2) [L 0 + L 1Y – M/P]. r = (1/L 2) [L 0 + L 1 m(e 0-e 1r) – M/P]. r = A r – B rM/P.