An important assumption in the application of the Mundell- Fleming model of exchange rates is that:
A) the balance of payments is in deficit.
B) the exchange rate is fixed.
C) a small open economy cannot influence overseas interest rates.
D) prices of short- dated bonds are more sensitive to market yields than long- dated bonds.

Question

Quizplus · Accepted Answer

The Mundell-Fleming model assumes a small open economy, meaning it cannot influence global interest rates, which are taken as given.

An Important Assumption in the Application of the Mundell- Fleming