Question

What is the relationship between exports and income?

1. The level of exports falls with income.
2. The level of exports is unrelated to income.
3. The level of exports rises with income as long as the marginal propensity to consume is positive.

How is it possible for a country to import more goods than it exports?

1. The government can subsidize exports.
2. Foreigners can lend the country money.
3. Private domestic banks can lend the country money.

Thank you!

Answer 1

Question 1

Option A is correct - The level of exports falls with income

As the level of income increases, the country's currency will have a greater value relative to foreign currency. Thus, with greater income in hands, the country's import increases and export decreases.

Question 2

Option B is correct - Foreigners can lend the country money

When the country borrows from a foreign country, the money supply in the country increases. This leads to greater imports and lesser exports.