Which of the following is a feature of the 'IS-LM-BP' or Mundell-Fleming model?
A. It analyses the effectiveness of monetary and fiscal policy under different exchange-rate regimes and degrees of capital mobility
B. It assumes a closed economy
C. It ignores the external sector completely
D. It assumes continuous full employment
Answer: Option A
Solution (By JKSSB Mock Tests)
The Mundell-Fleming model extends the IS-LM framework to an open economy and examines how the effectiveness of monetary and fiscal policy depends on the exchange-rate regime and the degree of capital mobility.
Explanation:
According to Keynes, the level of effective demand (where aggregate demand equals aggregate supply) determines the equilibrium level of employment and output.
Explanation:
Adverse selection in credit markets occurs when higher-risk borrowers are more eager to borrow at any given interest rate, so that the pool of applicants becomes riskier as the interest rate rises.
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