The AA schedule shows combinations of output and exchange rate at which two asset markets, namely the foreign exchange market and the money market are simultaneously in short-run equilibrium.
The AA schedule shows combinations of output and exchange rate at
which two asset markets, namely the foreign exchange market and the money market are simultaneously in short-run equilibrium.
a) Why does the AA schedule slope downwards?
b) Consider an increase in the domestic money supply. What is the effect on nominal exchange rate? Has the output changed? What happens to the AA schedule?
c) What other factors can cause a rightward shift in the AA schedule?
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