Consider the response of current account to exchange rate changes studied in class. In class, we showed that the response of the current account depends on the relative strength of the price (price of exports and price of imports) and volume (quantity of exports and quantity of imports) eşects. I assumed in class that the volume esects dominate. We derived the AA-DD model under that assumption. In this exercise you are asked to re-derive AA-DD model under an alternative assumption that the volume efect is weaker than the price efect. Please discuss how the AA and DD curves will change (if at all) under this alternative assumption. Plot your Öndings on the "new" AA-DD diagram.
Consider the response of current account to exchange rate changes studied in class. In class, we showed that the response of the current account depends on the relative strength of the price (price of exports and price of imports) and volume (quantity of exports and quantity of imports) eşects. I assumed in class that the volume esects dominate. We derived the AA-DD model under that assumption. In this exercise you are asked to re-derive AA-DD model under an alternative assumption that the volume efect is weaker than the price efect. Please discuss how the AA and DD curves will change (if at all) under this alternative assumption. Plot your Öndings on the "new" AA-DD diagram.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:Consider the response of current account to exchange rate changes studied in class. In class, we showed
that the response of the current account depends on the relative strength of the price (price of exports
and price of imports) and volume (quantity of exports and quantity of imports) eşects. I assumed in class
that the volume esects dominate. We derived the AA-DD model under that assumption. In this exercise
you are asked to re-derive AA-DD model under an alternative assumption that the volume efect is
weaker than the price efect. Please discuss how the AA and DD curves will change (if at all) under this
alternative assumption. Plot your Öndings on the "new" AA-DD diagram.
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