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Home Q & A Board Other Fields Homework Help Business Economics
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Chako Chako
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Posts: 2948
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8 years ago
Use a figure to study the following question: Imagine that the economy is at a point on the DD-AA schedule that is above both AA and DD, 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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#1
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
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#2
8 years ago
I doubted this website before I signed up. I regret not being a member earlier lol
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#3
7 years ago
Happy to help you!
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