Project Essay on DD-AA

 下面为大家整理一篇优秀的essay代写范文 --Project Essay on DD-AA，文章讲述实际汇率SP*/P的任何上升(下降)(无论是由于S的上升，P*的上升，还是P的下降)都将导致总需求函数向上(向下)移动和产出的扩张(收缩)。

DD curve

Any rise (fall) in the real exchange rate SP*/P (whether due to a rise in S, a rise in P*, or a fall in P) will cause an upward (downward) shift in the aggregate demand function and an expansion (contraction) of output.

If P and P* are fixed in the short run, a depreciation of the domestic currency (a rise in S) is associated with a rise in Y. This association provides us with one of the two relationships between S and Y needed to describe the short-run macroeconomic behavior of an open economy. We summarize this relationship by the DD schedule, which shows all combinations of output and the exchange rate for which the output market is in short-run equilibrium.

Changes in the exchange rate cause movements along a DD curve. Other changes cause it to shift as well.

The first one is changes in government demand; more government purchases cause higher aggregate demand and output in equilibrium. Output increases for every exchange rate: the DD curve shifts right.

The second one is changes in taxes, higher taxes generally decrease consumption expenditure, decreasing aggregate demand and output for every exchange rate: the DD curve shifts left.

The third one is changes in investment, higher investment demand shifts the DD curve to right.

The fourth one is changes in P relative to P*, higher domestic prices relative to foreign prices shift the DD curve to left.

The fifth one is changes in consumption, consumers who are willing to consume more and save less shifts the DD curve to right.

And the last one is changes in demand for domestic goods relative to foreign goods, consumers who are willing to consume more domestic goods relative to foreign goods shifts the DD curve to right.

AA curve

Because any point on the DD curve cannot determine the equilibrium output and the exchange rate, we have to find another relationship describing the relationship between the output and the exchange rate to complete the story of short-run equilibrium. The schedule of the exchange rate and the output combinations that are consistent with equilibrium in the domestic money market and the foreign exchange market is called the AA schedule.

Factors which are shifting the AA curve are due to five reasons, the reasons are as follows:

The first one is changes in M: an increase in the money supply reduces interest rates, causing the domestic currency to depreciate (a rise in E) for every Y: the AA curve shifts right.

The second one is changes in real money demand, if domestic residents are willing to hold greater real money balances, interest rates rise, leading to an depreciation of the domestic currency (a fall in E): the AA curve shifts left.

The third one is changes in R*, an increase in the foreign interest rates makes foreign currency deposits more attractive, leading to a depreciation of the domestic currency (a rise in E): the AA curve shifts right.

The fourth one is changes in E: if market participants expect the domestic currency to depreciate in the future, foreign currency deposits become more attractive, causing the domestic currency to depreciate(a rise in E):the AA curve shifts right.

And the last one is changes in P: an increase in the domestic price level decreases the real money supply, increasing interest rates, causing the domestic currency to depreciate (a fall in E): the AA curve shifts left.

If we assume price is held fixed in the short run, the equilibrium output and the exchange rates are determined by the cross of the DD and AA schedules simultaneously.  

Monetary policy and the current account

An expansionary monetary policy leads to the depreciation of home currency and an increase in output. It is easily seen that an expansionary monetary policy improves the current account.

Fiscal policy and the current account

If the economy starts at long-run equilibrium, a permanent change in fiscal policy has no net effect on output. Instead, it causes an immediate and permanent exchange rate jump that affects exactly the fiscal policy’s direct effect on aggregate demand.

An expansionary fiscal policy leads to the appreciation of home currency and an increase in output. From the figure, it is easily seen that both temporary and permanent fiscal policy deteriorates the current account.

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