Question

If a country's exports rise while its imports remain unchanged, the immediate effect on the country's aggregate demand will be:

Options

• Aggregate demand will fall to zero in a closed economy

• Aggregate demand will increase, as exports are injections into the economy

• Aggregate demand will decrease, as exports are leakages

• Aggregate demand will remain unchanged, since trade flows offset each other

Answer 1

Exports are injections into the economy that increase aggregate demand. With imports (leakages) unchanged, a rise in exports raises the overall level of aggregate demand in the country.