Asset market equilibrium in the short run (a) Using asset market equilibrium conditions explain how changes in output, Y , affect exchange rate (ie, how an increase/decrease in output affect the...

Asset market equilibrium in the short run

1. (a) Using asset market equilibrium conditions explain how changes in output, Y , affect exchange rate (ie, how an increase/decrease in output affect the exchange rate) Draw the relationship between output and exchange rate on a figure (ie, draw the AA schedule)


2. (b) Show graphically how AA schedule is affected by:

i an increase in expected exchange rate, E^e

ii an increase in domestic money supply, M^s

In each of these cases provide the intuition behind the change in AA schedule