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The Slope of the Aggregate Demand Curve

Mundell-Fleming Fixed Exchange Rate Illustration

Mundell-Fleming Fixed Exchange Rate Illustration

An increase in government spending forces the monetary authority to supply the market with local currency to keep the exchange rate unchanged. Shown here is the case of perfect capital mobility, in which the BoP curve (or, as denoted here, the FE curve) is horizontal.

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    http://upload.wikimedia.org/wikipedia/commons/b/bf/Mundell-Fleming_example_fixed_exchange_rate_.png CC BY-SA.

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