35. Equilibrium output and net exports: increased government spending

Interacting with graphs to learn more about the effects of government spending on the trade deficit

How do changes in demand affect output in an open economy? Suppose the economy is in recession and the government decides to increase government spending – so as to increase domestic demand and output. What will be the effects on output and on the trade balance?

Objectives

• Incorporate the foreign sector into the determination of equilibrium output

• Determine the effect of an increase in government spending on the trade deficit

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