Question

1.) The introduction of automatic teller machines, which reduces the demand for money, will,according to the Mundell–Fleming model with fixed exchange rates have no change in income or net exports.

True

False

Answer 1

Reduction in the demand for money due to the automatic teller machine is like an autonomous decline in the demand for money. This will shift the LM curve to the right leading to lower interest rate at each level of income. In a Mundell-Fleming Model, such a decline in the interest rate will cause capital outflow as investors will move to countries with comparatively higher interest rate. This will raise the demand for foreign currency and foreign investors will convert their holdings of domestic currency into foreign currency. This will put pressure on the exchange rate depreciate. However, there is fixed exchange rate regime so the Central Bank will intervene in the foreign exchange market and will buy domestic currency and will ensure that there is no depreciation of the domestic currency. As a result, there will be no change in income or net exports. So, the statement given is True.