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In: Economics

Explain permanent decrease in Monetary supply, use graphs from the AA-DD schedule model. (please draw) in...

Explain permanent decrease in Monetary supply, use graphs from the AA-DD schedule model. (please draw)

in addition, please explain a temporary , one-time decrease in Monetary supply . Also using the aa-dd model. thank you!

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Expert Solution

A permanent decrease in a country's money supply causes a proportional long run appreciation of its currency. The exchange rate is said to overshoot when its immediate response to a change is greater than its long run response. immediate effects on interest rates and exchange rates.

Changes in the supply and demand for money. The central bank controls the money supply, so it can take actions to increase the money supply and decrease the money supply. Changes in the money supply lead to changes in the interest rate. when real GDP increases, there are more goods and services to be bought.

Increasing the money supply also increase the interest rate, which discourages lending and investment. The higher interest rate also promotes saving, which further discourages private consumption. The decrease in consumption and investment leads to a decrease in growth in aggregate demand.

The AA DD model :

The AA-DD model integrates the workings of the money-Forex market and the G&S model into one supermodel. The AA curve is derived from the money-Forex model. The DD curve is derived from the G&S model. The intersection of the AA and DD curves determines the equilibrium values for real GNP and the exchange rate.

Graphs : explaining that decreasing in monetary supply from AA DD model

Asset Market (AA) : ERRh = ERRf Asset Market (AA) : ERRh = ERRf

Rahul Sunny answered 6 months ago
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