AD curve

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The AD curve is an economics term that is derived from the Mundell-Fleming model taking inflation into account . The exchange rate regime is of crucial importance here.

It actually consists of two curves, the AA curve and the DD curve . They form the AD diagram. This concept shows the balance in the goods market and the asset markets. It should be noted that the concept includes foreign trade.

The DD curve

The DD curve represents the goods market . Since we are in the short-term goods market equilibrium , total demand is equal to total production. The production, i.e. the economic output level , is determined depending on the exchange rates. Since we are in the short-term analysis, one can assume a given real exchange rate . A price adjustment in this period is also unlikely, so one can also assume fixed domestic and international prices. An appreciation or depreciation of the domestic currency can only take place through the decrease or increase of the export or the economic output.

The AA curve

The AA curve represents the asset market. Here, too, we are in a short-term analysis. To derive this, the domestic money market and the foreign exchange market are examined. The AA curve represents all exchange rate and production combinations in which these two markets are in equilibrium. Due to the short period, we assume that the foreign interest rate is given. The foreign exchange market can thus be described by the interest rate parity. Under the classic assumptions, the domestic money market is in equilibrium and is therefore secure.

The AD curve

The diagram of the AD curve shows the macroeconomic equilibrium at the intersection of the AA and DD curves. It should be noted that the domestic production volume is dependent on the exchange rates.

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