Consider the following diagram showing the \(A D\) curves in two different economies. One economy is Autarkland - it does not trade with the rest of the world (autarky is a situation in which a country does not trade with other countries). The other economy is Openland-it exports to and imports from the rest of the world.

a. Explain why an increase in the domestic price level (for a given exchange rate) reduces net exports in Openland. How would you illustrate this with the \(A E\) curve in the \(45^{\circ}\)-line diagram?

b. Explain why the \(A D\) curve is steeper in Autarkland than in Openland.

c. If there are never any net exports in Autarkland, why isn't the \(A D\) curve vertical? Explain what other aspect of the economy generates a downward-sloping \(A D\) curve.

Transcribed Image Text:

P AD OPENLAND AD AUTARKLAND Y