Assume that a small open economy gets involved in a global war,in which its government purchases increase and the rest of the world's government purchases also increase.Then,for the basic model of the small country,net exports:
A) will certainly decrease.
B) will certainly increase.
C) may increase or decrease.
D) will remain the same.

Question

Quizplus · Accepted Answer

In the basic model of a small open economy, net exports are determined by the difference between exports and imports. An increase in government purchases in the small open economy would lead to an increase in aggregate demand, which in turn would lead to an increase in imports. If the increase in government purchases by the rest of the world is larger, it could lead to an increase in exports from the small open economy, which would lead to an increase in net exports. On the other hand, if the increase in government purchases by the small open economy is larger, it could lead to a larger increase in imports, which would lead to a decrease in net exports. Therefore, the net effect on net exports could be either an increase or decrease and there is insufficient information to determine the direction with certainty. Thus, the correct answer is C) may increase or decrease.

Assume That a Small Open Economy Gets Involved in a Global