Explain how the AA schedule is derived
What will be an ideal response?
For a fixed real money supply, an increase in output leads to an increase in the domestic interest rate. In the foreign exchange market, an increase in the domestic interest rate leads to a lower nominal exchange rate, thus appreciating the currency. Therefore, the relationship between nominal exchange rate and output is negative; this leads to a negative slope of the AA schedule, which has the nominal exchange rate and output on its axes.
You might also like to view...
An increase in the employment tax should have a relatively small effect on output if the labor supply curve
A) is perfectly horizontal. B) has a positive slope. C) is relatively flat. D) is relatively stee
What is a credit card?
A) Money B) A convenient way to borrow money C) A bond D) A convenient way to sell a bond