Differences From IS-LM
It is worth noting that some of the results from this model differ from those of the IS-LM model because of the open economy assumption. Results for a large open economy, on the other hand, can be consistent with those predicted by the IS-LM model. The reason is that a large open economy has the characteristics of both an autarky and a small open economy. In particular, it may not face perfect capital mobility, thus allowing internal policy measures to affect the domestic interest rate, and it may be able to sterilize balance-of-payments-induced changes in the money supply (as discussed above).
In the IS-LM model, the domestic interest rate is a key component in keeping both the money market and the goods market in equilibrium. Under the Mundell–Fleming framework of a small economy facing perfect capital mobility, the domestic interest rate is fixed and equilibrium in both markets can only be maintained by adjustments of the nominal exchange rate or the money supply (by international funds flows).
Read more about this topic: Mundell–Fleming Model
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