0
$\begingroup$

Assume that the J-curve is true. What would the DD curve look like during the early period of the J-curve (where the value effect dominates)? What would the effect of temporary changes in monetary and fiscal policy look like with this DD curve?

I assume that the DD curve might be downward sloping because of the value effect, but I'm unsure how temporary changes in government spending and temporary changes in the money supply will affect the AA and DD schedules in this scenario. Would somebody please explain?

Improve this question
$\endgroup$

1 Answer 1

Reset to default
0
$\begingroup$

The DD curve will not be downward sloping because of the value effect dominating initially. It will shift to the left. enter image description here

Hence, a temporary expansionary fiscal policy or monetary policy can be used to dampen the impact of the J curve.

Improve this answer
$\endgroup$

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service and acknowledge that you have read and understand our privacy policy and code of conduct.

Not the answer you're looking for? Browse other questions tagged or ask your own question.