[r3b]

Hi,

I'm new to the form and I have some homework questions that I need help with. I have the solutions but I don't know the intuition behind the results, any help would be greatly appreciated.

The question I have is as follows;

xt= the integral of exp(t-s)E(k_s|F_t)ds

where s_t is the exchange rate at time t

Suppose at time t there is a permanent fall in y* so that y*_U2<y*_u1 for all u>t. What is the effect on x_u at times u>t?

The solutions show a graph with y on the x axis and p on the y with AD and AS curves. The solutions say that in the short run the AD curve shifts back and the AS curve shifts right, and the new equilibrium is the original y.

and in the long run the AD curve shifts up and the AS curve shifts back

could some one please explain these results?

Thank you for you help,
r3b

[r3b]

Sorry, I misunderstood the solutions, the first result (The solutions say that in the short run the AD curve shifts back and the AS curve shifts right, and the new equilibrium is the original y) is for the foreign economy, while the second ( the AD curve shifts up and the AS curve shifts back) is for the domestic economy.


In general, would the domestic and foreign curves always shift in the opposite direction? For example, if the AD curve shifts back for the foreign economy would it shift forward in the domestic economy?