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Economic Policies for Small Economies

1) The document discusses the assumptions of economic models developed by Mundell and Fleming regarding flexible and fixed exchange rates under fiscal and monetary policy. 2) Under flexible exchange rates, expansionary monetary policy increases money supply and decreases interest rates, leading to currency depreciation. Expansionary fiscal policy increases domestic output but the effect on the balance of payments is ambiguous. 3) Under fixed exchange rates, monetary policy is less powerful while fiscal policy is more effective at stimulating output. The effectiveness of both policies depends on capital mobility sensitivity to interest rates.

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Amanda Novriwani Saragih
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104 views1 page

Economic Policies for Small Economies

1) The document discusses the assumptions of economic models developed by Mundell and Fleming regarding flexible and fixed exchange rates under fiscal and monetary policy. 2) Under flexible exchange rates, expansionary monetary policy increases money supply and decreases interest rates, leading to currency depreciation. Expansionary fiscal policy increases domestic output but the effect on the balance of payments is ambiguous. 3) Under fixed exchange rates, monetary policy is less powerful while fiscal policy is more effective at stimulating output. The effectiveness of both policies depends on capital mobility sensitivity to interest rates.

Uploaded by

Amanda Novriwani Saragih
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd

Mundell – Asumsi: Flexible – Fiscal

• Perfect Capital Mobility


• All securities in the system are perfect substitutes
• Unemployed resources
• CRTS, Fixed Money Wage
• Rates → Elastic Supply of
• Domestic Output
• Price Level constant
• Small Economy
• Interest Rate parity

FISCAL / MONETER → Fixed

Flexible ER – Monetary Policy

Moneter ekspansif → JUB naik →


Ms naik, r turun
FISCAL / MONETER → Flexible

Flemming - Asumsi
• Taxation and Private Income after Tax berbanding lurus dengan
National Income
• Private Expenditure (C+I) berbanding lurus dengan Pendapatan
setelah pajak dan berbanding terbalik dengan suku bunga
NFA naik → Ms = NFA + NDA, so Ms naik → r turun • Interest rate berbanding lurus dgn income-velocity of circulation of
money (ratio pendapatan nasional thdp uang)
• Neraca perdagangan berbanding terbalik dengan Pengeluaran Dom. Additional
dan berbanding lurus dengan nilai mata uang dom terhadap asing
• Neraca Pembayaran pada akun modal varies directly with the rate of
interest
Fiskal Ekspansif
• Increase in income, employment, and output
• Capital Outflow and Depreciate ER (Increase in Balance of Trade)
→ BoP ambiguous
• It depends on the capital mobility sensitivity on interest rate.
Moneter Ekspansif
• Increase the Money supply and interest rate
• Stimulate private investment and consumption → Income and
Output increase
• Increase current account deficit and Capital Outflow → Depreciate
ER → restore the BoP
In General
• Monetary policy relatively more powerful in Flexible ER but not in
Flexible ER – Fiscal Policy Fixed ER
• The effectiveness of monetary and fiscal policy will depend on the
capital mobility sensitivity on interest rate
FIXED – MONETER (dY/dM)01

Fixed ER – Monetary Policy

Fixed – Fiscal (dY/dS)00

Flexible – Moneter

Fixed – Fiscal

Fiscal policy is effective under fixed ER

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