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Q. Explain how a rise in real income affects aggregate demand.
Answer: An increase in domestic real income Y leads to a rise in disposable income Yd. This increases the spending on imports IM therefore lowering the current account CA and reducing aggregate demand AD. Though, the rise in Yd as well causes a rise in consumption C and increases aggregate demand AD by more than the corresponding diminish.
Q. Explain how the German Bundesbank gained its low-inflation reputation. Answer: Essentially Germany's experience with hyperinflation in the 1920s and yet again aft
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Q. Use the DD - AA model to examine and compare the response of an economy under fixed and floating exchange-rate regimes to a temporary fall in foreign demand for its exports.
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