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When import increases, does the equilibrium output decrease or stay constant? I think it stays constant,...

When import increases, does the equilibrium output decrease or stay constant? I think it stays constant, because Consumption includes import. When import increases and C increases by the same amount. Thus, I think the equilibrium output will stay constant.

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Answer #1

When import increases, the equilibrium output decreases.

Reason:

Import is a function of aggregate demand. The expression of Aggregate demand (AD) is:

Where, C is consumption, I is investment, G is government spending, X is export and M is import.

As seen in the expression, import is a negative component, therefore a rise in import will cause fall in aggregate demand (AD). This will shift the AD curve leftward and causes equilibrium output to fall.

As shown in the figure below, AD curve shifts from AD to AD1, causes output to fall from Y to Y1.

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