6.3 Suppose that in a particular year there is a both an increase in the longrun equilibrium real exchange rate (g) and a decrease in the longrun equilibrium nominal exchange rate (QEJ. Within the context of the general model of long run exchange rate determination developed in section 6.5 of Lesson 6, this combination of events could be explained by an {increase fdecrease) in the level of domestic absorption (A), accompanied by a large (increasefdecrease) in the domestic money supply {114'}, assuming no changes in any other determinants of q and El {2 marks) Lesson T Questions 11 The diagram below shows two points (labeled A and B] on the DD curve of an economy, E 2 =3.e 1=2.e Y Aggregate demand for output in this economy is determined as follows: D = C+I+G+CA C =15 + HEMPT) I: 35 G: 50 T= 4'0 CA = lE-P *JP 0.2511111") P=P* =11} a) Given the information above, and applying the denition of the DD curve, we can calculate that Y1 = , while P = . (4 marks) 7.1 The diagram below shows two points (labeled A and B) on the DD curve of an economy. E E2 =3.0 E1 =10 Y Aggregate demand for output in this economy is determined as follows: D = C+I+G+CA C =15 + U.T5(YT) I = 35 G: 50 T= 40 CA = lE-PWP U.25(YT) P=P* =11} :1) Given the information above, and applying the denition of the DD curve, we can calculate that I"1 = . while Y" = . [4 marks) 1)) As the economy moves up the DD curve from point A to point B1 with the exchange rate rising from E1 to E2 and output increasing from Y1 to Y2, aggregate demand for output (D) increases by a total of units which is the sum of an increase in the current account balance (CA) of units and an increase in consumption spending (C) of units. [3 marks) 1:) Now suppose that the level of foreign prices increase (1)1\") from their current value of 1.0, with no change in domestic prices (P) and no change in any other exogenous variable. How, and why, does an increase in!\" affect the DD curve shown in the diagram above?I Explain. {3 marks)