In the DD-AA model, suppose there is a sudden and arbitrary shift in exchange rate expectations: Se
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Question:
In the DD-AA model, suppose there is a sudden and arbitrary shift in exchange rate expectations: Se simply rises.
(a) Show the short-run effect on the equilibrium exchange rate and output under a floating exchange rate regime.
(b) Under a fixed exchange rate regime, this would be a currency crisis, showing the short-run effect on the equilibrium exchange rate and output.
(c) How would the domestic interest rate (i) behave under both the floating exchange rate regime and the fixed exchange rate regime?
Expert Answer:
The AADD model represents a synthesis of the three previous market models the foreign exchange Forex market the money market and the goods and service... View the full answer
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