This economics question tests your understanding of economic models and analysis. The step-by-step answer below applies the relevant framework and explains the reasoning.
ScanSolve AI Answer
Step 1: Recall standard open-economy Keynesian model effects on output Y and trade balance TB = NX = X - IM. Domestic demand change ( (C + I + G)): Decrease: Y , IM , NX . Export change ( X): Increase: Y , NX . Decrease: Y , NX . Fiscal expansion G : domestic demand , so Y , NX . Step 2: Analyze statement A. Diagram B could represent decrease in domestic demand: Y , trade balance . This matches standard effect (Y , NX ). Correct. Step 3: Analyze statement B. Diagram A could represent increase in exports (inferred from partial text "increase in ... balance of payments"): Y , trade balance . This matches standard effect (Y , NX ). Correct. Step 4: Analyze statement C. Claims Diagram C represents chain G - I = Y - NX . G - I is net change in domestic demand. If net domestic demand , then Y , NX (not NX ). Y , NX would require export decrease, not domestic demand change. Incorrect. Step 5: Analyze statement D. Claims chain X - Z \, Y (likely X Y IM ) represents decrease in exports. Decrease X: NX Y IM . Chain direction consistent. Correct. Step 6: Conclusion. The INCORRECT statement is C. C