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The AD-curve under fixed exchange rates

We only needed to consider the FE curve and the IS curve when discussing the Mundell-Fleming model under fixed exchange rates. Mandatory intervention of the central bank in the foreign exchange market would adjust the money supply so as to move the LM curve into the predetermined position as well.

For the same reason, we now only need to consider the FE plane and the IS plane when deriving the AD curve under fixed exchange rates. Endogenous adjustment of the money supply through foreign exchange market intervention will make sure that the LM 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 IS plane.

View animated illustration


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