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Q. Explain how the AA schedule is derived.
Answer: For a fixed real money supply an enhancement in output leads to an increase in the domestic interest rate. In the foreign exchange market an enhancement in the domestic interest rate leads to a lower nominal exchange rate therefore appreciating the currency. Therefore the relationship among nominal exchange rate and output is negative this leads to a negative slope of the AA schedule which has the ostensible exchange rate and output on its axes.
Q. Explain the purpose of the given figure? Answer: To demonstrate that spot and forward exchange rates are in general close to each other.
Explain about constant,increasing and decreasing opportunity cost
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ABOUT THIS THEORY
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