Introduction

This is in fact an extension of the closed economy IS-LM model into what is often referred to as the IS-LM-BP or the Mundell –Fleming model. Bear in mind that when we look at an open economy, the government’s role is now one of achieving both internal balance and external balance.

Some of our objectives:

The implications of an open economy on the IS and LM curves?

Deriving the BP curve under different assumptions about the Degree of capital mobility.

Analysing the effectiveness of fiscal and monetary policies in an open economy