Question

Assume a nation’s economy is operating in equilibrium. If exports increase and imports decrease, how will...

Assume a nation’s economy is operating in equilibrium. If exports increase and imports decrease, how will output, employment, and price level likely change?

Output / Employment / Price Level

Increase / Increase / Increase

Increase / Increase / Decrease

Increase / Decrease / Increase

Decrease / Decrease / Increase

Decrease / Decrease / Decrease

Business   Economics   
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Homework Answers

Answer #1

Net exports = Exports - imports

When exports increases and imports decreases, Exports - Imports will increases and thus Net exports will increases. Increase in net exports result in equilibrium output in the goods market for any given interest rate and thus will shift IS curve to the right and this rightward shift of IS curve will result in Rightward shift of AD(Aggregate demand) curve while AS(Aggregate supply) curve will remain same.

This rightward shift of AD curve will result in increase in Output and increase in price level. As output increases, this means that more people are employed in orde rto produce this higher output and thus employment will also increase.

Thus, Output will increase, Employment will increse and Price level will also increase.

Hence, the correct answer is (a) Increase / Increase / Increase.

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