Draw a diagram and illustrate the effects of the following on the net exports function for the United States: a. The French government imposes restrictions on French imports of U.S. goods. b. The U.S. national income rises. c. Foreign income falls. d. The dollar depreciates on the foreign exchange market. Why is the slope of the \(C+I+G\) function different from the slope of the \(C+I+G+X\) function?

Short Answer

Expert verified
Answer: A depreciation of the dollar on the foreign exchange market makes U.S. goods relatively cheaper for foreign consumers, increasing the demand for U.S. exports and causing the net exports for the United States to increase.

Step by step solution

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1. Understanding Net Exports: Definition and Connection to GDP

Net exports (X) are the difference between a country's exports (goods and services produced domestically and sold to other countries) and its imports (goods and services produced in other countries and purchased by residents of the home country). The net exports function is one component of GDP, which is calculated as \(GDP = C + I + G + X\), where C is consumption, I is investment, and G is government spending.
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2. Event a: French government imposes restrictions on French imports of U.S. goods

If the French government imposes restrictions on French imports of U.S. goods, it will lead to a decrease in the demand for U.S. exported goods. As a result, the net exports for the United States will decrease.
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3. Event b: The U.S. national income rises

An increase in U.S. national income implies that consumers have more money to spend. This may lead to an increase in imports of foreign goods and services since domestic consumers can afford to buy more goods, including foreign products. As imports rise, the net exports for the United States will decrease.
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4. Event c: Foreign income falls

If foreign income falls, the purchasing power of foreign consumers decreases, leading to lower demand for the United States' exported goods. Consequently, the net exports for the United States will decrease.
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5. Event d: The dollar depreciates on the foreign exchange market

When the dollar depreciates on the foreign exchange market, the U.S. goods become relatively cheaper for foreign consumers. As a result, the demand for U.S. exports will increase, and the net exports for the United States will increase.
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6. Difference between the slopes of the \(C+I+G\) function and the \(C+I+G+X\) function

The \(C+I+G\) function represents the aggregate demand for domestically produced goods and services within an economy. The slope of this function is determined by the marginal propensity to consume, the marginal propensity to invest, and the marginal propensity for the government to spend. On the other hand, the \(C+I+G+X\) function represents total demand in the economy, considering both domestic and foreign demand for goods and services. The slope of this function is affected not only by the marginal propensities mentioned above but also by the marginal propensity of foreign countries to import goods produced in the United States. Therefore, the slope of the \(C+I+G+X\) function is different from the slope of the \(C+I+G\) function because it considers both domestic and international factors affecting aggregate demand for goods and services produced in the United States.

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