Use the following to answer questions:
-(Figure 7-1: Circular-Flow Model) Use Figure 7-1: Circular-Flow Model. If the circular-flow model is in equilibrium (the sum of money flowing into each box is equal to the sum of the money flowing out of it) and there is an increase in exports, holding everything else constant, which outcome is likely to occur?
A) a decrease in the nominal GDP
B) a decrease in the real GDP
C) a decrease in the unemployment rate
D) a decrease in the inflation rate

Question

Use the following to answer questions: 
-(Figure 7-1: Circular-Flow Model) Use Figure 7-1: Circular-Flow Model. If the circular-flow model is in equilibrium (the sum of money flowing into each box is equal to the sum of the money flowing out of it) and there is an increase in exports, holding everything else constant, which outcome is likely to occur?
A) a decrease in the nominal GDP 
B) a decrease in the real GDP 
C) a decrease in the unemployment rate 
D) a decrease in the inflation rate

Quizplus · Accepted Answer

An increase in exports means that more money is flowing into the product market box, which will cause an imbalance in the equilibrium. In order to return to equilibrium, firms will increase their production and employment, decreasing the unemployment rate. This will result in an increase in output and income, thereby increasing the real GDP. Since there is no information given regarding the money supply or the aggregate demand, it is not possible to determine the effect on the inflation rate or the nominal GDP.

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