How is the AA schedule derived?
A) The AA schedule has a positive slope because an increase in output leads to a depreciation of the currency.
B) The AA schedule has a negative slope because an increase in output leads to a decrease in the domestic interest rate.
C) The AA schedule has a negative slope because an increase in output leads to an increase in the domestic interest rate and a domestic currency appreciation.
D) The AA schedule has a positive slope because an increase in the money supply leads to an increase in the domestic interest rate.
E) The AA schedule has a positive slope because a decrease in output leads to a depreciation of the currency.

Question

Quizplus · Accepted Answer

The AA schedule shows the combinations of exchange rates and interest rates that are consistent with a given level of output. An increase in output leads to an increase in the demand for money, which in turn leads to an increase in the domestic interest rate. This attracts capital inflows, leading to a domestic currency appreciation, hence the negative slope.

How Is the AA Schedule Derived