Suppose an economy is in equilibrium and initial equilibrium output equals its full-employment level, denoted Yf. Suddenly there is a temporary shift in consumer tastes away from domestic products. Show the effects of such a shift on output and exchange rate. (Hint: Use DD and AA curves)
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Expert's answer
2020-06-08T11:43:42-0400
If there is a temporary shift in consumer tastes away from domestic products, then the demand for imports and for foreign currency will increase, as a result both the output and exchange rate will decrease.
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