Macroeconomics

Australia Is A Small Open Economy With A Flexible (Floating) Exchange Rate System Use The

Question 2.
Australia is a small open economy with a flexible (floating) exchange rate system. Use the
Mundell-Fleming model (i.e. the open-economy IS-LM-IP model) to analyse what will
happen to income, the exchange rate, and the trade balance (net exports) in response to the
following shocks. Carefully explain the adjustment process in each case.
a) A significant fall in the foreign demand for Australian minerals export.
b) The Abbott government implements a fiscal expansion program, other things held
constant, and the Reserve Bank of Australia keeps the interest rate fixed.Macroeconomics

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