P/E/108. 'The Mundell-Fleming model is an economy which adds a balance of payments equilibrium (BP) curve to the IS/LM model.'(Bain and Howells, 2003)

The essay provides explanations for each model: BP and IS/LM, it discusses what the combinations of the BP shows, what devaluation and revaluation does to the BP curve. Also paper presents expansionary fiscal policy and the effect it has on the following variables; home country output, home country interest rate, home country current account balance, current account balance of trading partners and home central bank reserves. The same analysis was done for the monetary policy in order identify which policy is the most effective one to under flexible exchange rate system