7.1 The diagram below shows two points (labeled A and B) on the DD curve of an economy. E DD E- =3.0 E' =2.0 A Y Aggregate demand for output in this economy is determined as follows: D = C+I+G+CA C = 15 + 0.75(Y-T) I = 35 G= 50 T = 40 CA = 10E-P*/P - 0.25(Y-T) P=P* =1.0 a) Given the information above, and applying the definition of the DD curve, we can calculate that Y' = , while Y = (4 marks) b) As the economy moves up the DD curve from point A to point B, with the exchange rate rising from E' to E' and output increasing from Y' to Y', aggregate demand for output (D) increases by a total of units which is the sum of an increase in the current account balance (CA) of units and an increase in consumption spending (C) of units. (3 marks) c) Now suppose that the level of foreign prices increase (1 P*) from their current value of 1.0, with no change in domestic prices (P) and no change in any other exogenous variable. How, and why, does an increase in P* affect the DD curve shown in the diagram above? Explain