HW # 1t]: PROBLEM SET TI'IE DD-AA Model: Fiscal and Monetary Policy under Flexible and Fixed Exchange Rates In doing the following graphical problems, closely follow the models shown in the textbook and in the class lectures. These problems should help in preparing for the nal exam. 1} Using the aggregate demand curve, graphically derive the DD curve. Tell bney what the assumptions are. Explain what you are doing and show the sequential causal chain of effects. What does the DD curve represent? What variables shift the DD curve? 2} Using money supplymoney demand and the interest rate parity relationship, derive the AA curve graphically. Tell what the assumptions are. Explain what you are doing and show the sequential causal chain of effects. What does the AA curve represent? What variables shift the AA curve? 3} Use the DD and the AA curves to determine equilibrium output {Y} and exchange rate {E}. In the graph, draw the XX curve to show the combinations of Y and E for which the current account is constant. Why is the Kit curve atter than the DD line? What happens to the current account for points above the XX curve? For points below the XX curve? 4} Using the DDAA model under flexible exchange rates, show {a} the effects of monetary policy in the shortrun, and {b} the effects of monetary policy in the long-nin. What accounts for the difference between the shod-mn and the long nrn? What are the main results? 5} Using the DDAA model under flexible exchange rates, show {a} the effects of scal policy in the shortan, and (b) the effects of scal policy in the longrun. What are the main results? 5} Using money supplymoney demand and the interest rate panly relationship, show how the central bank can maintain xed exchange rates in the face of changes in output. it} Using the DDLAA model under xed exchange rates, show the effects of monetary policy. What are the main results? 3} Using the DDLAA model under xed exchange rates, show the effects of scal policy. What are the main results? 9} Using the DDAA model under xed exchange rates, show the effects of a devaluation policy. What are the main results? 1ft}Using money supplymoney demand and the interest rate parity relationship, show how the central bank can deal with a balance of payments crisis and capital ight