Question

Derive AA and DD schedules? (You should use graphs!)

Answer 1

Answer :-

AA Schedule :-

This is the combination of E and Y which represents equilibrium in money market. This curve is downward slopped, since there is an inverse relationship between E and Y in money market, keeping other vanables constant, (nvestment, govemment spending. ncome, prices of exchanging countnes).

Required equation is as below:

E = a - bY

The starting point of AA is "a" on the vertical axis, and "b' is the slope of AA curve.

• DD Schedule :-

It represents equilibrium in goods market with a positive relationship between exchange rate (E) and Gross National Products (Y). In the process of doing so, all the other variables (investment, govemment spending. income, prices of exchanging countries) should be kept constant.

Since all other variables are constant, the equation would be as below:

E = a + bY

This is the inverse DD function, where "a" is the starting point of DD curve on the vertical intercept and "b" represents slope of the DD curve.