In the long-run ISLM model and with everything else held constant,the long-run effect of a fall in net exports is to ________ real output and ________ the interest rate.
A)increase;increase
B)increase;not change
C)not change;increase
D)not change;decrease

Question

Quizplus · Accepted Answer

In the long-run, the IS curve is vertical and the LM curve is horizontal, indicating that changes in net exports do not have an effect on output but only affect the interest rate. A fall in net exports would decrease the demand for domestic goods, leading to a decrease in output in the short-run. However, in the long-run, prices and wages adjust, bringing output back to its potential level. The change in net exports would lead to a decrease in the demand for money, shifting the LM curve to the left and lowering the interest rate. Therefore, the long-run effect is a decrease in the interest rate but no change in output.

In the Long-Run ISLM Model and with Everything Else Held