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Chapter 17: II part - Coggle Diagram
Chapter 17: II part
Shifting the AA Curve
- Expected Future Exchange Rate (Ee)
If participants expect depreciation (Ee↑) → currency depreciates now (E rises) → AA shifts up/right.
Increase in R* → foreign assets more attractive → domestic currency depreciates (E rises) → AA shifts up/right.
Increase in P → reduces real money supply → interest rates rise → currency appreciates (E falls) → AA shifts down/left. Decrease in P → AA shifts up/right.
- Demand for Real Money Assets L(R,Y)
If demand for money falls → interest rates fall → domestic currency depreciates (E rises) → AA shifts up/right.
Increase in M → lowers interest rates → domestic currency depreciates (E rises) → AA curve shifts up/right.
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