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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