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Q. Explain how an increase in government spending would affect the DD-AA schedule in the short run.
Answer: A raise in government spending will raise aggregate demand, which will shift the DD to the right. If AA leftovers unchanged the new equilibrium will be at a higher Y and lower E. Ever since E is the nominal exchange rate a lower E is an appreciation of the currency.
In the Ricardian analysis, why does each trading partner have an incentive to produce at an endpoint of its production-possibility frontier? Why are prices of factors of production
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Q. Why do governments prefer to avoid excessive current account surpluses? Or, why are growing domestic claims to foreign wealth ever a problem? Answer: On behalf of a given l
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