Imagine that the economy is at a point on the DD-AA

Imagine that the economy is at a point on the DD-AA schedule that is above both AA and DD, where both the output and asset markets are out of equilibrium. Which first action is true?

A.The economy will stay at this level in the short

B.The exchange rate will first drop to a point on the AA

C.The exchange rate will first move to a point on the DD

D.The AA-DD equilibrium will shift to the position of the

E.None of the

Answer: B