The Mundell–Fleming model, also known as the IS-LM-BoP model (or 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 autarky (or a closed economy), the Mundell–Fleming model describes a small 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. An economy can only maintain two of the three at the same time. This principle is frequently called the "impossible trinity," "unholy trinity," "irreconcilable trinity," "inconsistent trinity," "policy trilemma," or the "Mundell–Fleming trilemma." Basic set-up Assumptions Basic assumptions of the model are as follows: Spot and forward exchange rates are identical, and the existing exchange rates are expected to persist indefinitely. Fixed money wage rate, unemployed resources and constant returns to scale are assumed. Thus domestic price level is kept constant, and the supply of domestic output is elastic. Taxes and saving increase with income. The balance of trade depends only on income and the exchange rate. Capital mobility is less than perfect and all securities are perfect substitutes. Only risk neutral investors are in the system. The demand for money therefore depends only on income and the interest rate, and investment depends on the interest rate. The country under consideration is so small that the country cannot affect foreign incomes or the world level of interest rates. Variables This model uses the following variables: Y is real GDP C is real consumption I is real physical investment, including intended inventory investment G is real government spending (an exogenous variable) M is the exogenous nominal money supply P is the exogenous price level i is the nominal interest rate L is liquidity preference (real money demand) T is real taxes levied NX is real net exports Equations The Mundell–Fleming model is based on the following equations: The IS curve: where NX is net exports. The LM curve: A higher interest rate or a lower income (GDP) level leads to lower money demand. The BoP (Balance of Payments) Curve: where BoP is