General economic equilibrium in an open economy (model Mandell - Fleming).

The Mundell–Fleming model, also known as the IS-LM-BP model, is an economic model first set forth (independently) by Robert Mundell and Marcus Fleming.The model is an extension of the IS-LM model. Whereas the traditional IS-LM Model deals with economy under a closed economy, the Mundell–Fleming model describes an open economy.

The Mundell–Fleming model portrays the short-run relationship between an economy's nominal exchange rate, interest rate, and output (in contrast to the closed-economy IS-LM model, which focuses only on the relationship between the interest rate and output). The Mundell–Fleming model has been used to argue that an economy cannot simultaneously maintain a fixed exchange rate, free capital movement, and an independent monetary policy.

The Mundell–Fleming model is based on the following equations.

(the IS curve)

where is GDP, is consumption, is physical investment, is government spending and is net exports.

(The LM Curve)

where is the nominal money supply, is the price level, is liquidity preference (real money demand), and is the nominal interest rate. A higher interest rate or a lower income (GDP) level leads to lower money demand.

(The BoP Curve (Balance of Payments))

where is the balance of payments surplus, is the current account surplus, and is the capital account surplus.