Question

You are an economic advisor to the president. You observe an increase in exports. Assume the economy was operating at the fullemployment level of real GDP prior to the increase in exports. Describe the state of the economy and advise the president on the appropriate policy action by completing the following sentences.

a. The increase in exports will lead to ____ in net exports and in turn ____ in aggregate demand As a result, real GDP will
b. The problem that this event will cause is _____ .
c. Appropriate ____ policy actions would include _____ taxes and/or ____ government purchases.
d. These actions will smooth out the business cycle by _____ actual real GDP back toward full-employment GOP.

Answer 1

An increase in exports leads to higher aggregate demand, which can cause inflation if the economy is already at full employment. The president should consider fiscal policy measures such as increasing taxes or decreasing government spending to cool down the economy and prevent overheating.

Step-by-step explanation:

An increase in exports will lead to an increase in net exports and in turn an increase in aggregate demand. As a result, real GDP will likely increase beyond the full-employment level of output, potentially leading to inflationary pressures.

The problem that this event will cause is inflation and a possibility of an overheating economy. This could lead to a situation where demand outstrips the economy's capacity to produce, increasing prices and distorting resource allocation.

Appropriate fiscal policy actions would include increasing taxes and/or decreasing government purchases. By doing so, the government can withdraw some of the excess demand from the economy, helping to preempt inflationary pressures.

These actions will smooth out the business cycle by guiding actual real GDP back toward full-employment GDP, and stabilizing economic growth at a sustainable rate.