For #21-26, use the AA/DD framework to predict the macroeconomic effect of shocks in the U.S. and Saudi Arabia on outcomes in Saudi Arabia. Assume that all shocks are temporary and that Saudi Arabia pegs its riyal to the dollar (as is the case in practice). 21. Saudi investment falls. All else equal, in the short run Saudi output should (a) Rise (b) Stay unchanged (c) Fall Answer: (c). A reduction in investment reduces Saudi aggregate demand, leading to a leftward shift in the DD curve which reduces output. Since this shock also puts depreciation pressure on the riyal, the Saudi authorities need to run contractionary monetary policy to maintain the peg, shifting the AA curve down and further reducing output. 22. Consider the same shock as in #21. All else equal, in the short run Rriyal will (a) Rise (b) Stay unchanged (c) Fall