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Loanable funds theory explains the relationship between interest rates and available funds. Fiscal and monetary policies impact this theory. The Mundell-Fleming Model discusses exchange rates, interest rates, and output in an open economy.
Loanable funds theory refers to the relationship between interest rates and the quantity of loanable funds available in an economy. The demand for loanable funds comes from borrowers, while the supply comes from savers and investors.
Fiscal and monetary policies influence the demand and supply of loanable funds. Expansionary fiscal policy, such as an increase in government spending, can lead to higher demand for funds, potentially raising interest rates. In contrast, contractionary monetary policy, like decreasing the money supply, can reduce the supply of funds, also impacting interest rates.
The Mundell-Fleming Model (MFM) explains the relationship between exchange rates, interest rates, and output in an open economy. It shows that under a system of fixed exchange rates, a country cannot simultaneously have free capital movement, a fixed exchange rate, and independent monetary policy.
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