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Determine about the Mundell-Fleming model
The basic two country Mundell-Fleming model assumes that both countries are small. It is this assumption that we modify and assume instead that both countries are large to make their spillover effects significant. Only with this modification can spillover effects be modelled, and the issue of policy coordination discussed. All other assumptions of the Mundell-Fleming model, however, are maintained. In particular we assume that there is perfect capital mobility, and that increases in aggregate demand lead to an expansion in national income rather than wage and price inflation.
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