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Effects of Output and Exchange Rate in the Short Run

Explore the impact of output and exchange rates in the short run on the AA and DD schedules. Learn how changes in factors like investment, government spending, and price levels affect equilibrium. Discover strategies to maintain full employment during economic fluctuations.

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Effects of Output and Exchange Rate in the Short Run

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  1. Output and Exchange Rate in the Short Run 1 2 1 2 1

  2. AA - Schedule Along the AA schedule: Exchange rate A AA-schedule shifters: 1. A change in 2. A change in 3. A change in 4. A change in 5. A change in A Output 2

  3. DD - Schedule Aggregate Demand (D) D=Y Y Assumption: Investment and Private Consumption are not sensitive with respect to the real rate of interest 3

  4. DD - Schedule S D DD-Schedule Shifters 1. T, G 2. P or P* 3.Investment D Y 4

  5. The Equilibrium in the Short Run D A S A D Y Full equilibrium obtains when asset market and output market are equilibrated 5

  6. A’ A given: M A’ A AA: 6

  7. Interactions Between Output and Exchange Rate S D (P,G,r) are given G D Y DD: 7

  8. Maintaining full employment after a fall in demand for the country’s export 2 1 The Result : Depreciation 8

  9. A Transitory Monetary Expansion S D 2 1 D Y 9

  10. A Permanent Monetary Expansion S D Short run 2 3 1 D Y The AA-schedule shifts rightwardly because ( Point 3: Transitory Monetary Expansion) 10

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