Suppose the rest of the world experiences an expansion that causes an increase in foreign income (Y*).From the domestic economy's perspective,this increase in foreign income will cause which of the following as the domestic economy adjusts to the rise in Y*?

Question

Quizplus · Accepted Answer

An increase in foreign income (Y*) typically leads to an increase in demand for domestic goods, which results in an increase in domestic income as domestic producers ramp up production to meet the foreign demand. This also leads to an increase in net exports, as the domestic economy is exporting more to the foreign economy. Additionally, with an increase in domestic income, domestic consumers may increase their consumption, including of imported goods, leading to an increase in imports. Therefore, all of the listed effects (A, B, and C) are likely outcomes, making D the correct answer.

Suppose the Rest of the World Experiences an Expansion That