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Q. Using a figure, show that under full employment, a temporary fiscal expansion would increase output (over-employment) but cannot increase output in the long run.
Answer: A temporarily monetary expansion will move the economy from DD1 to DD2 and output increases. A permanent financial expansion will as well shift the AA curve to the left and down. The small exchange rate appreciates that is E decreases.
Opportunity cost theory
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Q. Describe the chain of events leading to exchange rate determination for the following cases: 1. An increase in the U.S money supply 2. An increase in the growth rate of the
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