Finance Questions 90 3-1

1. Suppose the US can be described by an AA-DD model. Assume the US maintains a fixed exchange rate to the British pound and is initially in equlibrium at full employment output.

1. Use the AA-DD diagram to work out the effects of an increase in government spending in the long-run. Identify the final effects on GNP, the exchange rate, the current account balance, the price level, interest rates and unemployment


2. Use the AA-DD diagram to work out the effects of a dollar devaluation in the long-run. Identify the final effects on GNP, the exchange rate, the current account balance, the price level, interest rates and unemployment.

International Finance Theory and Policy - Chapter 90: Last Updated on 1/6/08