Consider an economy where the current account is negatively affected by a depreciation in the real exchange rate in the short run (that is, the Marshall-Lerner condition does not hold). Explain the effects of a monetary expansion in this economy by comparing it to the baseline case where the Marshall-Lerner condition holds. Use a graphical analysis accompanied by an intuitive (verbal) explanation. (UPDATE: Assume that the DD curve under the revised assumption will be steeper than the AA curve.)
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