Consider the Dornbusch model of Chapter 22. Draw a graph with price level, P, on the vertical axis and exchange rate, e, on the horizontal axis.
Graph the following curves by clicking here
Explain the asset market equilibrium of this model. Why does the AA line slope downward? Graph this line.
What does purchasing power parity imply about the relationship between P and e? How is this relationship reflected in the 0L line? Graph this line.
How would a decrease in the money supply be depicted in this graph? Label any new curves. How will e and P adjust?
Describe exchange rate “overshooting” in the context of your graph.
Consider the Dornbusch model of Chapter 22. Draw a graph with price level, P, on the vertical axis and exchange rate, e, on the horizontal axis.
Graph the following curves by clicking here
Why does the AA line slope downward? Graph this line.
Why does the OL line slope upward? Graph this line.
How would an increase in the money supply be depicted in this graph? Label any new curves. How will e and P adjust?
