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5. Country A had a historically closed economy. Country A decides to engage in international trade...

5. Country A had a historically closed economy. Country A decides to engage in international trade with the result they become a net exporter. Because of this, what happens to price of the good they are now exporting? a. increase b. stay the same c. first decrease then increase d. decrease

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Answer #1

Answer: c

Net export = Export – Import

Since there is net export, the amount of export is higher than import. It could only be happened if goods are demanded to foreigners. Goods could only be demanded if the price level is low (decrease), indicating a low inflation rate in the country A now.

But, net export is a component of AD; it increases GDP of the country; increasing GDP increases price level too, which makes an increasing price of exports in the long-run.

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