Net exports and foreign demand

a. Suppose there is an increase in foreign output. Show the effect on the domestic economy (i.e., replicate Figure 18-4). What is the effect on domestic output? On domestic net exports?

Figure 18-4

b. If the interest rate remains constant, what will happen to domestic investment? If taxes are fixed, what will happen to the domestic budget deficit?

c. Using equation (18.5), what must happen to private saving? Explain.

Equation 18. 5

d. Foreign output does not appear in equation (18.5), yet it evidently affects net exports. Explain how this is possible.

Transcribed Image Text:

Demand, Z Net exports, NX O 45 AX>0 TAX>0 YTB ANX Output, Y ANX Output, Y Domestic demand for goods DD ZZ' ZZ Demand for domestic goods NX NX'