Draw the AA/DD model on a graph. Show on the graph the impact of a permanent...

Draw the AA/DD model on a graph. Show on the graph the impact of a permanent increase in money supply. What is the impact on the following variables:
1. Short-run output
2. Long-run output
3. Short-run interest rates
4. Long-run interest rates
5. Short-run exchange rates
6. Long-run exchange rates
7. Short-run prices
8. Long-run prices

Solutions

Expert Solution

AA-DD Model:- It represents a combination of the three previous market models, the foreign exchange market, the money market and the goods and services market. DD stands for derived demand and AA stands for aggregate demand.

Impact of a permanent increase in money supply:-

The AA curve shifts upwards whenever Money Supply (Ms) increase.

1. Output and the exchange rate in short run:

A fall in world demand for output shifts DD1 and DD2 and output Y1 falls to Y2.

2. Output and the Exchange rate in the short run:

Temporary expansion in monetary policy, fiscal policy.

3. Long-Run output, exchange rate and interest rate:

Rahul Sunny answered 1 month ago

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