Question

Suppose we have an economy, A, in macroeconomic equilibrium as given by the open economy Income-Expenditure model. If this country's trade partner, B, experienced a downturn in their economy, the impact of this, assuming no other variables in both countries were deliberately changed, would be to reduce the output in this particular country, country A. -True -False

Answer 1

True: A country trade depends not only on the economic activity in that country but also on the economic activity of its trading partners. In this case although economy A is in equilibrium, but because of the recession in economy B which is it's trade partner, there will be less income and inturn less consumption in economy B, which means there will be less demand for the good and services that are imported from economy A, when there is a less demand, the production falls and output is reduced for the goods in economy A.