Question: Consider the following two situations. a) A sudden temporary decrease in the relative demand for local goods. b) A sudden optimistic outlook for the domestic

Consider the following two situations. a) A sudden temporary decrease in the relative demand for local goods.

b) A sudden optimistic outlook for the domestic currency (all else equal), leading to an expected appreciation.

For both cases use the DD-AA framework to evaluate the effect on output and the exchange rate. If the government is committed to maintaining both full employment and stable exchange rates, which temporary policies would you recommend in both situations?

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