Output and Exchange Rate in the Short Run

A A Exchange rate Output AA - Schedule 2 Along the AA schedule: AA-schedule shifters: 1. A change in 2. A change in 3. A change in 4. A change in 5. A change in

D=Y Y DD - Schedule 3 Aggregate Demand (D) Assumption: Investment and Private Consumption are not sensitive with respect to the real rate of interest

S Y D 4 DD - Schedule D DD-Schedule Shifters 1. T, G 2. P or P* 3.Investment

A A D D Y S The Equilibrium in the Short Run 5 Full equilibrium obtains when asset market and output market are equilibrated

M given: A A A’ AA: 6

S Y D D Interactions Between Output and Exchange Rate (P,G,r) are given G DD: 7

8 1 2 Maintaining full employment after a fall in demand for the country’s export The Result : Depreciation

9 D D 1 2 S Y A Transitory Monetary Expansion

10 D D 1 2 S Y Short run A Permanent Monetary Expansion The AA-schedule shifts rightwardly because ( Point 3: Transitory Monetary Expansion) 3