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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. Use a figure to study the following question: Consider that the economy is at a point on the DD-AA schedule that is above both AA and DD, where both the asset and output markets
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explain the newo clacical theory of international trede
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