This is decrease not increase.

NOTES Wh Consider the model of output and exchange rate determination (the AA-DD-XX model) we have studied in class. Suppose the economy begins at a short run equilibrium point where exchange rate is at a level Eo and Output equal Yo. Compare and contrast the short-run effects of a temporary decrease in home taxes under a floating exchange rate regime to the effects under a fixed exchange rate regime. Be sure to fully discuss the mechanism and channels by which we arrive at the effects on home output, the home current account, and the nominal exchange rate. Use AA-DD-XX diagrams to support your answers. (Clearly explain and show the effects on two different graphs, one for flexible rates and the othefor fixed rates.) (14) NOTES Wh Consider the model of output and exchange rate determination (the AA-DD-XX model) we have studied in class. Suppose the economy begins at a short run equilibrium point where exchange rate is at a level Eo and Output equal Yo. Compare and contrast the short-run effects of a temporary decrease in home taxes under a floating exchange rate regime to the effects under a fixed exchange rate regime. Be sure to fully discuss the mechanism and channels by which we arrive at the effects on home output, the home current account, and the nominal exchange rate. Use AA-DD-XX diagrams to support your answers. (Clearly explain and show the effects on two different graphs, one for flexible rates and the othefor fixed rates.) (14)