In the following diagram, with fixed exchange rates, The economy is in domestic equilibrium at income level __________ and there is__________. A) Y₁; a balance-of-payments surplus B) Y₂; a balance-of-payments deficit C) Y₂; a balance-of-payments surplus D) Y₃; equilibrium in the balance of payments

Question

Quizplus · Accepted Answer

The diagram shows that the domestic equilibrium level of income is Y₂, which is above the level of output that would equate the demand for domestic goods and services (YD1). This indicates that there would be a balance-of-payments surplus, as there would be excess supply of goods and services in the domestic economy compared to demand from trading partners, leading to an increase in net exports.

In the Following Diagram, with Fixed Exchange Rates