In a simple Keynesian model,when net exports increase,the
A) C + I + G + (X - M₁) line shifts downward.
B) 45-degree line becomes flatter.
C) multiplier falls to zero.
D) aggregate demand curve shifts to the left.
E) equilibrium level of GDP increases by an amount greater than the increase in net exports.

Question

Quizplus · Accepted Answer

In a simple Keynesian model, an increase in net exports causes an increase in aggregate demand (C + I + G + X - M₁), which shifts the 45-degree line upward. This leads to an increase in equilibrium GDP. As the increase in net exports is a component of the aggregate demand, its increase will lead to an increase in GDP, but the increase will be greater than the increase in net exports alone. This is because the initial increase in net exports will trigger a further increase in spending, through the income-expenditure multiplier effect. Therefore, the equilibrium level of GDP increases by an amount greater than the increase in net exports, making option E the correct choice.

In a Simple Keynesian Model,when Net Exports Increase,the