What happens to output and real money balance

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The economy in question is a small open economy that pegs its currency to a foreign currency. The outbreak of the pandemic hits the economy hard. Retail sales plunge drastically, as the country closes it border and the number of shoppers drops.

a) What happens to output and real money balance in both short run and long run if the market expects the impact of COVID-19 is short-lived? Explain and support your answer by ONE DD-AA diagram (only the first diagram will be graded and compare your answers to the initial long-run equilibrium).

b) Redo part (a) if the if the market expects the impact of COVID-19 is long-lasting. Support your answer with a NEW DD-AA diagram.

Note: You can assume the economy is in its long-run equilibrium initially.

Reference no: EM132586652

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