3. Within the framework of the Mundell Flemming Model,
a) In an economy where there is partial movement of capital, the uncertainty increases, and the interest on external debt rises in the free exchange rate regime. In this case, in which direction is the demand-side balance of the economy moving? (The LM curve is steeper than the BOP curve). How do the exchange rate, money supply, national income, and interest change?
b) How does the Central Bank's devaluation affect the demand-side balance of the economy under the fixed exchange rate regime in an economy where capital is fully mobile? How do exchange rates, money supply, national income, and interest rates change?
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