The likely effects of the 2010-11 debt crisis* in the eurozone - Essay Example

Download file to see previous pages... In light of the mechanisms at the disposal of authorities across the Eurozone in dealing with the crisis, three recurrent economic tools come into focus than ever before.
These economic tools for consideration are the exchange rates, trade balance and interest rates that determine governments’ decisions in financing their budgets for instance through debts. In the incorporation of the appropriate balance to deal with the debt crisis, Mundell-Fleming Model forms one of the most applicable interventions in debt macroeconomics that could be applied to resolve the Eurozone crisis. In this discourse, various perspectives are discussed to form the basis of possible intervention by a European state outside the Eurozone which is an open economy and conducts much of its trade with the Eurozone.
IS-LM Mundell-Fleming Model was separately put together by Robert Mundell and Marcus Fleming building on Hicks IS/LM model of a closed economy to generate a model suitable for the open economy. The Mundell-Fleming model is a representation of the economic nexus with which nominal exchange rate, interest rates as well as input are related. In this model, the performance of the domestic economy must be in tandem with the world economy which is represented by the balance of payment element to the IS/LM model. Two separate settings are envisaged under the two models under domestic and world economies since they are considered differently. Similarly, domestic economies are considered as open or closed depending on the composition of the trade balance defined by real output or input. Under this model, short run interventions of the performance of the economy can be effected using the three tools mentioned above namely; interest and exchange rates as well as trade balance. It is therefore precise to sum up the IS-LM Mundell-Fleming model as the economic model that considers the IS, LM and BOP relationships to determine the appropriate economic ...Download file to see next pagesRead More