Question

True or false w/ proof:

5. Consider an open economy with flexible prices and flexible exchange rate. If the government reduces its spending, this will have a positive impact on net exports and could have a negative impact on the output of its trade partners. (5 points)

Answer 1

The given statement is 'False'

the reason or the proof is that when you actually decrease the government spending what happens is that the benefits or the subsidies that are actually given to exporters will reduce as a result of which the exports become more costly for foreign countries as a result of which the export skin decrease due to decrease in demand and this can result in reduction in the net exports as a result of which there would be negative impact in the net exports. however this can increase the demand for its trade partners abroad as a result of which the import skin increase with which the trade partners can better off.

T