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Macroeconomics

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Expansionary Fiscal Policy and Net Exports

MACRO-IREABP

Assume that expansionary fiscal policy raises both the price level and the real output in Country X.

What is likely to be the impact on Country X's next exports?

A

Net exports in Country X will decreases. The higher domestic price level in Country X will reduce export sales. The higher real GDP or income will increase purchases of imports.

B

Net exports in Country X will increase.. The higher domestic price level will attract buyers of country X's products and citizens of Country X will purchases more of their own products.

C

The effect on net exports is ambiguous. The higher price level will lead to fewer exports but the higher GDP will promote exports.

D

Net exports in Country X will decrease. The higher domestic price level will decrease net exports as more goods are sold to foreigners. The higher GDP will decrease net exports as fewer exports are demanded given the increase in real domestic income.