Question

A depression abroad will tend to _______ our exports, which in turn will _______ net exports, which in turn will ______ equilibrium real GDP.

1. reduce; reduce; reduce

2. increase; increase; increase

3. reduce; increase; increase

4. increase; reduce; reduce

Short answer

Option (a) reduce; reduce; reduce

Step-by-step solution

Step 1. Meaning of economic depression

Economic depression is the extended form of recession. During a depression, economic growth, real GDP (output), and employment fall severely. Depressions are rare to observe as compared but more significant in magnitude.

During a depression, low income and employment decrease the consumption and demand in the market. The reduced demand and supply bring prices to a low level. Hence, deflation prevails in the economy.

Step 2. Explanation for the answer

Depression in a foreign country will reduce their output and price level. Due to low income, demand for exports will decline. The domestic exports will be less than imports, and net export will decline. Ultimately, the equilibrium real GDP will decline because the output produced will not be consumed in foreign countries.