Shifting BP curve

What causes the BP curve to shift? Changes in exports, imports. An increase in exports or a decrease in imports shifts the BP curve to the right, and vice versa.

Can you think of any other factors?

Open economy equilibrium
Equilibrium in an open economy occurs at the intersection of the IS, LM and BP curves.

What does the Mundell-Fleming model (when we have a fixed exchange rate system) say about the effectiveness of both monetary and fiscal policy:

Since the Mundell-Fleming model assumes perfect capital mobility the BP curve is therefore horizontal.


An increase in Ms shifts the LM curve down to LM1 causing domestic r to fall below the foreign interest rate (r*). Capital outflow results giving rise to an excess demand for foreign currency. Under a fixed exchange rate system, the central bank intervenes by selling foreign currency in exchange for domestic currency. This reduces the amount of domestic currency in circulation and hence reduces the Ms in the country. LM therefore shifts right back up to its original position. Monetary policy is hence totally ineffective under these circumstances of perfect capital mobility and a fixed exchange rate.