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Incorporate uncertainty in the financial market

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Reference no: EM131298507

Consider two economies, A and B.  Recently, a referendum was held in country B and B's voters voted to leave a political and economic bloc with other countries.  The result of the referendum in B shocked the world and had sparked vast uncertainty to the financial market.  According to the DD-AA model, country A would experience a deterioration of its current account." True/False/Uncertain, explain with the aid of ONE DD-AA diagram. 

Note: 

Think about how you would incorporate uncertainty in the financial market.

Assume the shock is a permanent one.

Compare your answer to the initial long-run equilibrium.

Country A is NOT a member of the political and economic bloc that B belonged.

Quote the exchange rate as # of A$ per B$, i.e., EA$/B$.

Use the subscripts A and B to denote all terms and variables used for countries A and B respectively.  You must follow the above instructions; otherwise, you will receive a grade of ZERO for the whole question.

Reference no: EM131298507

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