An increase in domestic demand will have which of the following effects in an open economy?

Question

Quizplus · Accepted Answer

An increase in domestic demand will lead to an increase in imports, which will reduce the trade balance. However, the increase in imports will also lead to an increase in output, as domestic firms will need to produce more goods and services to meet the increased demand. The overall effect on output will be smaller than in a closed economy, as some of the increased demand will be met by imports.

An Increase in Domestic Demand Will Have Which of the Following