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Use the Mundell-Fleming model to examine the effects - for case of a small open economy....

Use the Mundell-Fleming model to examine the effects - for case of a small open economy. But allow for the assumption that in the money demand equation, price P depends on domestic production price (assumed fixed) and the price of imported goods. Show on a diagram how the IS and LM curves shift if there is an exchange rate appreciation, and examine with drawing the effects in this model of an increase in government spending with floating exchange rates under no capital mobility.

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Increase in government spending increases the aggregate expenditure curve which results in expansionary fiscal policy.

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