Implementing fixed exchange-rate regime

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Suppose that a small open economy is in equilibrium and that the government is analyzing the benefits and problems that can arise from implementing a fixed exchange-rate regime.

(a) Use the Mundell-Fleming model to describe how this small open economy would react to a decrease in government spending under a fixed exchange-rate regime and under a flexible exchange-rate regime. What is the main difference from these alternative regimes? Illustrate graphically.

(b) Use the Mundell-Fleming model to describe how this small open economy would react to a decrease in the money supply under a fixed exchange-rate regime and under a flexible exchange-rate regime. What is the main difference from these alternative regimes? Illustrate graphically.

Reference no: EM131376423

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