Other things equal, an increase in an economy's exports will
A) lower the marginal propensity to import.
B) have no effect on domestic GDP because imports will change by an offsetting amount.
C) decrease its domestic aggregate expenditures and therefore decrease its equilibrium GDP.
D) increase its domestic aggregate expenditures and therefore increase its equilibrium GDP.

Question

Quizplus · Accepted Answer

An increase in exports will lead to an increase in foreign demand for the economy's products, which in turn will increase its domestic aggregate expenditures and therefore increase its equilibrium GDP. This is because exports are a component of aggregate expenditures, and an increase in exports will directly increase the economy's output and income. Option A is incorrect because the marginal propensity to import is the ratio of imports to income, and it is not affected by changes in exports. Option B is incorrect because an increase in exports will not necessarily cause an offsetting change in imports. Option C is also incorrect because an increase in exports will increase, not decrease, the economy's equilibrium GDP.

Other Things Equal, an Increase in an Economy's Exports Will