In an IS-LM model, if net exports is no longer assumed to be exogenous (that is, NX = NX?), but instead is assumed to decrease as the level of income increases (that is, NX = NX? - mY, with m 0), then

Question

In an IS-LM model, if net exports is no longer assumed to be exogenous (that is, NX = NX?), but instead is assumed to decrease as the level of income increases (that is, NX = NX? - mY, with m > 0), then

Quizplus · Accepted Answer

If net exports decrease as income increases, then there will be a negative relationship between income and net exports. This means that at any given interest rate, a higher level of income will lead to a lower level of net exports. Thus, the IS curve will become steeper because the same increase in interest rates will need to produce a larger decrease in income to maintain a given level of demand. Furthermore, the IS curve will shift to the left because the decrease in net exports will reduce aggregate demand at any given interest rate. Therefore, the correct answer is A.

In an IS-LM Model, If Net Exports Is No Longer