What might cause the world interest rate to rise

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The Mundell-Fleming model takes the world interest rate r as an exogenous variable. Leti´s consider what happens when this variable changes.

(a) What might cause the world interest rate to rise?

(b) In the Mundell-Fleming model with a a´oating exchange rate, what happens to aggregate income, the exchange rate, and the trade balance in a small open economy when the world interest rate rises?

(c) In the Mundell-Fleming model with a O¨xed exchange rate, what happens to aggregate income, the exchange rate, and the trade balance in a small open economy when the world interest rate rises?

Reference no: EM13979018

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