Abstract
Based on an extended Mundell-Fleming model, this paper finds that both fiscal expansion and monetary expansion raise output in Malaysia and that a lower real interest rate, a higher stock value, a lower real oil price and a lower expected inflation rate increase output. Hence, a managed floating system with no predetermined path of the exchange rate adopted by Malaysia may lead to better outcomes than the predictions of the Mundell- Fleming model that fiscal expansion does not raise output under a floating exchange rate but increases output under a fixed exchange rate whereas monetary expansion increases output under a floating exchange rate but does not affect output under a fixed exchange rate (Mankiw, 2019).
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