The Great Depression that started in 1929 was A) confined only ...

[PhilipSeeMore]

The Great Depression that started in 1929 was
 
  A) confined only to the United States.
  B) confined only to the United States and Britain.
  C) confined only to the United States and Europe.
  D) a global phenomenon.
  E) confined only to the Americas.

Question 2

Use a figure to study the following question: 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. Explain what will happen next.
 
  What will be an ideal response?

[joanwhite]

Answer to Question 1

D

Answer to Question 2

Since the asset market adjusts very quickly, the exchange rate drops immediately to a point on the AA schedule. There will be excess demand for the domestic currency because the high expected future appreciation rate of the domestic currency implies that the expected domestic currency return on foreign deposits is below that on domestic deposits. This excess demand leads to an immediate fall in the exchange rate.
The figure:

[PhilipSeeMore]

Excellent

[mohan]

Thanks for the timely response, appreciate it