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Chako Chako
wrote...
Posts: 2948
8 years ago
Imagine that the economy is at a point on the DD-AA schedule that is above both AA and DD and where both the output and asset markets are out of equilibrium. Explain what will happen next?
Textbook 
International Economics: Theory and Policy

International Economics: Theory and Policy


Edition: 10th
Author:
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Replies
wrote...
8 years ago
 Since the asset market adjusts very quickly, the exchange rate drops immediately to a point on the AA schedule. There will be excess demand for the domestic currency because the high expected future appreciation rate of the domestic currency implies that the expected domestic currency return on foreign deposits is below that on domestic deposits. This excess demand leads to an immediate fall in the exchange rate.
Chako Author
wrote...
8 years ago
Good answer, thank you
wrote...
7 years ago
Thanks for the feedback, I'm sure others will appreciate it too
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