Use the DD-AA model to examine the effects of a one-time rise in the foreign price level, P*. If the expected future exchange rate rises immediately in proportion to P* (in line with PPP), show that the exchange rate will also appreciate immediately in proportion to the rise in P*. If the economy is initially in internal and external balance, will its position be disturbed by such a rise in P*?

step-by-step explanation: given equation a = h(b 1+b 2)

also we are given values of a, h and b 1 as :

a = 16, h = 4, and b 1 = 3.

in order to solve it for b 2, we need to plug the given values of   a, h and b 1 .

therefore, plugging values of   a, h and b 1   in given equation, we get

16 = 4( 3 + b 2)

first dividing both sides by 4, we get

4 = 3 + b 2

subtracting 3 from both sides, we get

4 -3 = 3 -3 + b 2

1 = b 2.

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