ABSTRACT
Under flexible exchange rates, the central bank does not administer the price of foreign exchange. This restores control over the money supply to the central bank. The exchange rate is determined in the private market. It will adjust so that in equilibrium there is balance of payments equilibrium. In the fixed exchange rate model the money supply and liquidity-money (LM) curve do the equilibrating, in the flexible exchange rate this role is taken over by the exchange rate and the IS curve. The properties of the IS-LM model under perfect capital mobility were first explored by Robert Mendel and J. Marcus Fleming working independently in the 1960s. In their honor, the open economy IS-LM model under perfect mobility is often called the Mundel-Fleming model. The Mundel-Fleming model permits a particularly clear comparison between the effects of monetary and fiscal policy under the two polar extremes, fixed and flexible exchange rate regimes.
