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Consider current account in the framework of the AA-DD model, where the current account is given by: CA = CA(q,Y) = EX(q) IM(q,Y), where 9

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Consider current account in the framework of the AA-DD model, where the current account is given by: CA = CA(q,Y) = EX(q) IM(q,Y), where 9 = EP*/P is the real exchange rate, and Y is national income. Suppose that the initial situation is in the equilibrium, and the current account in the initial situation is X. (1) Explain what the real exchange rate, q, means. (2) Explain what the XX curve means. Draw the graphs of AA and DD curves and the graph of XX curve corresponding to the initial situation. (3) Since the economy is now in a recession with a large current deficit, the central authority attempts to raise output and to improve current account simultaneously. What kind of policy should be implemented? Explain. Consider current account in the framework of the AA-DD model, where the current account is given by: CA = CA(q,Y) = EX(q) IM(q,Y), where 9 = EP*/P is the real exchange rate, and Y is national income. Suppose that the initial situation is in the equilibrium, and the current account in the initial situation is X. (1) Explain what the real exchange rate, q, means. (2) Explain what the XX curve means. Draw the graphs of AA and DD curves and the graph of XX curve corresponding to the initial situation. (3) Since the economy is now in a recession with a large current deficit, the central authority attempts to raise output and to improve current account simultaneously. What kind of policy should be implemented? Explain

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