Question

why is the DD curve steeper than AA?

why is the DD curve steeper than AA?

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Answer #1

An increase in the exchange rate in the goods and services market raises equilibrium GNP and as a result the DD curve is positively sloped.AA curve is negatively sloped. The effect of a decrease in the money supply is to shift AA curve downward.AA curve is derived from money forex model while the DD curve is derived from G&S model.The DD curve may  be negatively sloped and the DD curve will be steeper than AA curve in the short run if the currency depreciates and as a result there is J -effect on Current account.The J -curve effect is that the balance of trade of the country becomes bad in the beginning as a result of devaluation or depreciation of the currency and then it recovers and moves to a level which is higher than the initial level.

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