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Based on the simplified model of a choice between a domestic currency deposit in dollars and...

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Economics

Based on the simplified model of a choice between a domesticcurrency deposit in dollars and a foreign currency deposit inEuros, illustrate and explain the derivation of the AA curve ofKrugman-Obstfeld-Melitz. What does the AA curve represent?

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3.6 Ratings (546 Votes)
The AA curve show the relationship between the exchange rate andequilibrium GNP The foreign exchange market depicted in the toppart of Figure 94 Derivation of the AA Curve plots the rates ofreturn on domestic US assets RoR and foreign Britishassets RoR The domestic US money market in thelower quadrant plots the real US money supplyMSP and real money demandLi Y The asset marketequilibriums have several exogenous variables that determine thepositions of the curves and the outcome of    See Answer
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