AB 204 Course Great Wisdom / tutorialrank.com AB 204 Course Great Wisdom / tutorialrank.com | Page 11

a) Why do net exports and net capital outflows tend to be equal?
How does an increase in the price level change interest rates?

b) How does this change in interest rates lead to changes in
investment and net exports?

3) Assume there is a decrease in the demand for goods and
services, which leads to a decrease in the real GDP and
eventually the economy into recession.

a) When the economy enters recession due to a decline in
demand, what will happen to the price level?

b) Assume there is no government intervention. What will
ensure that the economy still eventually gets back to the natural
rate of output (real GDP)?

4) A number macroeconomic variables decline during
recessions. One of these variables is the GDP.

a) What other variables, besides real GDP, tend to decline
during recessions? Given the definition of real GDP and its
components, explain the declines in these economic variables
which are to be expected.