In the long-run ISLM model, the long-run effect of a fall in net exports is to
A)increase real output and the interest rate.
B)increase real output and not affect the interest rate.
C)not affect real output and increase the interest rate.
D)not affect real output and reduce the interest rate.

Question

Quizplus · Accepted Answer

In the long-run ISLM model, the economy is at full employment, so a fall in net exports will not affect real output. However, it will lead to a decrease in the interest rate to maintain equilibrium in the money market.

In the Long-Run ISLM Model, the Long-Run Effect of a Fall