Identify the correct statement.
A)As domestic income rises, imports rise and net exports fall.
B)As foreign income rises, net exports fall.
C)As domestic income falls, imports rise and net exports fall.
D)As domestic income rises, imports fall and net exports rise.
E)As foreign income falls, net exports rise.

Question

Quizplus · Accepted Answer

According to the income effect, when domestic income rises, there is an increase in demand for goods and services, including imported goods, leading to an increase in imports. However, as domestic goods and services become relatively more expensive, foreign goods become relatively cheaper leading to a decrease in net exports.

Identify the Correct Statement