Problem
a) In the IS-LM-FE (Mundell-Fleming) open-economy macroeconomic model with imperfect capital mobility, what does the term 'imperfect capital mobility' actually mean? (Clue: why is the FE curve not drawn horizontal?)
b) In the IS-LM-FE (Mundell-Fleming) open-economy macroeconomic model with imperfect capital mobility, explain what happens to the FE curve when the domestic currency appreciates on the foreign exchange market. (Do not merely state what happens. Explain clearly why it happens.)
c) Using diagrams, explain the consequences of a fiscal expansion funded by bond sales, within an economy operating under the assumptions of the IS-LM-FE (Mundell-Fleming) open-economy macroeconomic model with imperfect capital mobility and floating exchange rates,
(i) when the FE curve is more interest elastic than the LM curve.
(ii) when the LM curve is more interest elastic than the FE curve.
In each case, compare the predictions of each version of the model with those of the closed economy IS-LM model.
d) Which of the versions of the model discussed in part c) is more applicable to an economy with a central bank managing liquidity to maintain a constant policy interest rate? Explain your selection.