Booms and recessions (IV): dynamic aggregate supply and demand - Equilibrium income and inflation: the DAD curve

5 important questions on Booms and recessions (IV): dynamic aggregate supply and demand - Equilibrium income and inflation: the DAD curve

What does the μ represent in the DAD curve under flexible exchange rates and what is it's algebraic expression?

The money growth rate
μ = m - m-1

Why does μ have a coefficient of exactly 1 in the DAD curve under flexible exchange rates?

Because if all other factors are held constant the nominal money supply must grow with exactly the inflation in order to keep the real money supply constant (real money supply is constant under flexible exchange rates)

What is the formula for the DAD curve under fixed exchange rates?

π = ε + πW - bY + bY-1 + γΔYW + δΔG - f(ΔiW + Δεe)
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Why do ΔiW and Δεe have an coefficient of 1 in the DAD curve under fixed exchange rates?

Because if all factors are held constant, then in order to keep a demand sided equilibrium under fixed exchange rates the real exchange rate has to stay constant.

When does real exchange rate remain unchanged under fixed exchange rates?

When domestic inflation equals world inflation plus devaluation.

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