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The Mundell-Fleming Model

Add a foreign sector to the IS/LM Model.

The Augmented IS/LM Diagram

The IS Curve

Let X denote exports, and let Z denote imports.  Y = C + I + G + X - Z and Y = C + S + T.

For comparison:  The IS Curve without foreign transactions.

The LM Curve


The BP Curve

A zero in the balance of payments.  X - Z is the trade balance.  F is the net capital inflow.  X - Z + F = BOP, where BOP is balance of payments, which equals net official reserve transactions.  X - Z + F = 0

Getting Started with EconModel

The EconModel presentations are interactive graphical simulations of models.  more info.

To activate the EconModel presentation you need to download and install the EconModel program.  more info.


There are many variations on the analysis of the Mundell-Fleming Model.  These include fixed vs. flexible exchange rates, high vs. low capital mobility, fiscal vs. monetary policy, etc.

The EconModel presentation allows you to interactively study all these cases.

Building Blocks

The EconModel presentation explains the following curves:

IS Curve

LM Curve

BP Curve


The EconModel presentation analyzes the effects of changes in:

Monetary Policy

Fiscal Policy

Comments?  Questions?  macro-at-econmodel-dot-com  Copyright 2006 William R. Parke