Imagine That the Economy Is at a Point on the DD-AA

question 79

Multiple Choice

Imagine that the economy is at a point on the DD-AA schedule that is above both AA and DD, where both the output and asset markets are out of equilibrium. Which first action is true?

• A) The economy will stay at this level in the short run.
• B) The exchange rate will first drop to a point on the AA schedule.
• C) The exchange rate will first move to a point on the DD schedule.
• D) The AA-DD equilibrium will shift to the position of the economy.
• E) The exchange rate will first move left to a position on the AA schedule.

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Definitions:

Potential Loss

The amount of money that could be lost in an investment or financial transaction under adverse conditions.

Call Premium

The amount by which the price of a call option exceeds its intrinsic value, reflecting the cost to purchase the option above its immediate exercise value.

Call Contract

An agreement that gives the option buyer the right, but not the obligation, to buy a specified quantity of an asset at a predetermined price within a certain time frame.

Put Contract

A financial contract giving the holder the right, but not the obligation, to sell a specified amount of an underlying security at a specified price within a specified time.