The inclusion of a strong negative correlation between net exports and GDP in the definition of aggregate demand serves
A) to make the IS curve steeper in direct opposition to the effect of the correlation between net exports and the exchange rate.
B) to make the IS curve flatter in direct opposition to the effect of the correlation between net exports and the exchange rate.
C) to amplify the effect of the correlation between net exports and the exchange rate in making the IS curve steeper.
D) to amplify the effect of the correlation between net exports and the exchange rate in making the IS curve flatter.
E) none of the above.

Question

Quizplus · Accepted Answer

The negative correlation between net exports and GDP means that as GDP increases, net exports decrease. This makes the IS curve steeper because it means that a given increase in government spending or a decrease in taxes will lead to a smaller increase in output than it would if net exports were not negatively correlated with GDP.

The Inclusion of a Strong Negative Correlation Between Net Exports