AA-DD MODEL

Many small countries have found their net exports worsening after a devaluation,rather than improving. This is especially true for oil importers. Because the demand for oil is relatively inelastic in the short run, many small countries discover that a depreciation against the dollar raises their oil import bill proportionately when expressed in domestic currency, thus worsening their trade balance. When the value effect of a depreciation dominates the volume effect, net exports decrease after a real currency depreciation. How would you draw the DD-AA diagram for these small countries that depend heavily on oil imports? Assume that the DD schedule is steeper than the AA schedule. Use this modified diagram to examine the very short run effects of both temporary (i) monetary expansion and (ii) fiscal expansion.