1. Balance of payment : Book Keeping The balance of payment is essentially an application of double entry book keeping, since it records both transactions and the money flow associated with those transactions.

18. Mundell-Fleming Model (ISLM-BP Model) Perfect capital mobility National Income Rate Of INTEREST An increase in government spending forces the monetary authority to supply the market with local currency to keep the exchange rate unchanged. Shown here is the case of perfect capital mobility, in which the BoP curve (or, as denoted here, the FE curve) is horizontal

19. Mundell-Fleming Model (ISLM-BP Model) complete capital immobility RATE OF INTEREST & MEC O Y’’ Y’ BP’’ BP’ LM’’ IS’’ IS’ LM’ National Income In case of monetary expansion, LM’’ SHIFT TO LM’ then new equilibrium will form at intersection of LM’ and IS’’. Then BOP deficit, hence IS’’ shifts to IS’ With floating exchange rate, both IS and BP will shift to the right. Hence new equilibrium at E2 and rate of Interest also falls. The level of output increases to Y’ E2 E1

21. Mundell-Fleming Model (ISLM-BP Model) Partial capital mobility RATE OF INTEREST & MEC O Y BP IS LM National Income E