Mundell-Fleming Model and Phillip’s Curve

1.-Mundell-Fleming Model: You are the chief economic adviser in a small open economy with a floating-exchange-rate system. Your boss, the president of the country, wishes to increase the level of output in the short run in order to win re-election.

a) Do you recommend using expansionary or contractionary, monetary or fiscal policy? (Choose one) Use the Mundell-Fleming model to illustrate graphically your proposed policy and explain why you chose fiscal or monetary policy.

b) What if your country has a fixed exchange rate, what is the only policy mix that can be implemented? Explain why and show in Mundell model.

2. Phillip’s Curve: For each of the following draw an AD/AS diagram and a corresponding Phillip’s curve assuming the following: (1) suppliers produce more goods and services when price increases; (2) actual GDP is 9,200; (3) full employment GDP is 10,000; (4) the natural rate of unemployment is 5.5%.

a) Show in both diagrams the effect of an increase in government purchases that pushes actual GDP up to full employment.

b) Again assume actual GDP is at 9,200, show in both diagrams the effect of the Federal Reserve Bank selling treasury bonds to banks.

c) Again assume actual GDP is at 9,200, in both diagrams show the long run effect if the government does nothing.