Dd-aa Assignment Example | Topics and Well Written Essays - 250 words

Dd-aa - Assignment Example The reverse movement in the above variables will result in a leftward shift. The AA curve illustrates the relationship between changes in the exogenous variable which is the Gross National Product as well as one of the endogenous variables known as the exchange rate located in the asset market model. The curve operates effectively as long as all the other exogenous variables are fixed. Factors that cause an upward shift in the AA curve include an increase in money supply, foreign interest rates and expected exchange rate. It may also be due to decline in the domestic price. Reverse changes in the above factors will lead to a downward shift in the AA curve (Friedman, 102-134). The DD-curve indicates a set of equilibrium in the Goods and Service market by describing the level of GNP at the prevailing exchange rate while the AA-curve shows a set of equilibrium in the asset market. A combination of the DD and AA curve will result in an equilibrium point at which the role played by both firms as well as households will influence a movement in the exchange rate and Gross Domestic Product level provided that other exogenous variables are fixed. Fiscal policy refer to the impact of government spending and taxation on macroeconomic conditions while monetary policy refers to the actions of the central bank that influences the supply of money in the