Final answer:
Combining the Mundell-Fleming model and portfolio balance approach helps understand the impact of policies on open economies and exchange rates. Diversified portfolios are vital for managing risk and fostering stability, not necessarily ensuring success. Decisions like merged currencies and portfolio investments have significant financial implications.
Step-by-step explanation:
Combining the Mundell-Fleming model with the portfolio balance approach provides a more comprehensive understanding of how monetary and fiscal policy affect an open economy with different exchange rate regimes. The Mundell-Fleming model suggests that under fixed exchange rates, fiscal policy is more effective than monetary policy, and under floating exchange rates, monetary policy is more effective. On the other hand, the portfolio balance approach emphasizes that changes in fiscal and monetary policy can alter the composition of investors' portfolios and consequently influence exchange rates and capital flows.
Portfolio diversification is crucial for economic success since it helps in risk mitigation. Answering the question of whether a diversified savings and investing portfolio ensures economic success is complex. While diversification is important for managing risk and achieving more stable returns over time, it does not guarantee absolute economic success. Factors such as market volatility, economic cycles, and individual investment choices also play significant roles.
A merged currency, or the choice of a nation to use another nation's currency, can have profound effects on a country's monetary policy and financial stability. Similarly, portfolio investment, which is a passive investment in another country's financial assets, can affect the demand and supply in global financial markets.