Mundell-Fleming Model

The Mundell-Fleming model is an economic theory that describes how a country's economy interacts with the global market, particularly under different exchange rate regimes. It shows how monetary and fiscal policies, like changing interest rates or government spending, can affect economic outcomes such as inflation, unemployment, and currency value. The model highlights the trade-offs between controlling inflation, maintaining a stable currency, and achieving full employment, illustrating that a country can typically focus on only two of these goals at the same time—especially in a world with free capital flow.