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The AD-curve: flexible exchange rates

We only needed to consider the FE curve and the LM curve when discussing the Mundell-Fleming model under flexible exchange rates. We could always rest assured that the exchange rate would adjust so as to move the IS curve into the predetermined position as well.

For the same reason, we now only need to consider the FE plane and the LM plane when deriving the AD curve under flexible exchange rates. Reactions of the exchange rates will make sure that the IS plane passively moves into the proper position.

The following animation shows how to extract the AD curve from a 3-dimensional graph that merges the FE plane and the LM plane.

View animated illustration


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