Assume that we observe both imports and exports declining in a particular economy. Everything else remaining...

Assume that we observe both imports and exports declining in a particular economy. Everything else remaining the same:

Select one:

a. we would expect no change in aggregate demand but aggregate supply should fall.

b. it is impossible to determine what will happen.

c. we would expect no change in aggregate demand but aggregate supply should rise.

d. we would expect aggregate demand to rise.

e. we would expect aggregate demand to fall.

Expert Solution

In the Keynesian model, Aggregate demand means demand for a goods or services by all the people in the country. The graphical representation of the AD is aggregate demand curve.

AD= consumption + Investment + Government expenditure + export – Import

It means aggregate demand includes government purchases and taxes, consumer spending and investment spending and export minus import.

It means export and import is the part of the Aggregate demand only.

The short-run aggregate supply is upward sloping and it shows the positive relationship between price level and real GDP. So it can be said that the aggregate supply curve shows the various amounts of real output that businesses will produce at each price level.

But export and import does not affect the Aggregate supply curve.

Since imports and exports both are decreasing but magnitude changes is not given. So it is not possible to tell with the more information, what will be the effect of decrease in the export and imports simultaneously on the AD.

Hence option b is the correct answer.

Rahul Sunny answered 8 months ago

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