Positive Economics: AA-DD Curves - Assignment Example

The DD curve is a curve that shows the relationship between the changes in one exogenous variable and another endogenous variable. It is a curve showing the set of exchange rates and the combinations of Gross National Product that brings about equilibrium in the goods as well as the services market provided that the values of other exogenous variables are fixed. A change in one of the exogenous variables will result in a shift in the DD curve either to the left or to the right. A rightward shift is brought about by increases in investment demand, transfer payments, foreign prices, and government demand or a decrease in domestic prices and taxes.

The reverse movement in the above variables will result in a leftward shift. 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 rates.

It may also be due to a decline in domestic prices. Reverse changes in the above factors will lead to a downward shift in the AA curve (Friedman, 102-134). A combination of the DD and AA curves 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 refers 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 economy.