Question

In 2018, the U.S. aggregate real GDP, Y, increased faster than it had been growing in the previous few years, while net exports declined. We want to figure out what factors may have caused this outcome. Assume that the markets for money and for goods and services were both in equilibrium at all times. We know that the LM curve did not shifted in that year. Which one of the following factors could have contributed to the higher GDP growth and lower net exports of the US economy in 2018?

a. A reduction in net taxes.

b. A decrease in the nominal interest rate.

c. A decrease in the expected inflation rate.

d. A decrease in the expected return on investment.

e. A rise in the real incomes of US trading partners.

Answer 1

Option A is correct

Reduction in net taxes will reduce tax collection and decrease public saving. National savings decreases and supply of loanable funds decreases. On the other side in the goods market there will be an increase in disposable income and this will shift the IS curve to the right. higher interest rate in domestic market appreciates domestic currency and reduces net exports. In this way while the GDP is increased the net exports are the reduced