The figure given below represents the circular flow of income between households, firms, financial intermediaries, and foreign countries.
Figure 4.2

-Refer to Figure 4.2. Assume investment spending decreases by $4,000. Everything else being the same, what must be the new value of net trade flows in order to maintain total expenditures on business firms' output at $35,000?

Question

The figure given below represents the circular flow of income between households, firms, financial intermediaries, and foreign countries.
Figure 4.2
 
-Refer to Figure 4.2. Assume investment spending decreases by $4,000. Everything else being the same, what must be the new value of net trade flows in order to maintain total expenditures on business firms' output at $35,000?

Quizplus · Accepted Answer

If investment spending decreases by $4,000, then the total expenditures on business firms' output will also decrease by $4,000. To maintain total expenditures on business firms' output at $35,000, the decrease in investment spending needs to be offset by an increase in net trade flows.

From the circular flow diagram, we can see that an increase in net trade flows will increase the amount of money flowing from foreign countries to firms. Therefore, the new value of net trade flows should be equal to the decrease in investment spending, which is $4,000 (since everything else remains the same).

The initial net trade flows in the diagram are $2,500. Therefore, the new value of net trade flows should be:

$2,500 + $4,000 = $6,500

Therefore, the correct answer is D) $6,500.

The Figure Given Below Represents the Circular Flow of Income