Assuming other factors being constant, a fall in imports results in a fall in aggregate demand.

Question

BlackTom AI · Accepted Answer

In considering the impact of a fall in imports on aggregate demand (AD) with other factors held constant, we should start from the basic AD identity: AD = C + I + G + (X - M), where X is exports and M is imports.

Option 1: True — 'a fall in imports results in a fall in aggregate demand.' This claim would imply that reducing imports lowers AD. However, when imports fall (M decreases) while other components remain unchanged, the term (X - M) becomes larger because you're subtracting a smaller number for M. An increase in (X - M) adds to AD, not subtracts from it. Therefore, this statement is inconsistent with the AD equation, and is misleading as a general claim. The intuition someone might have is that imports are spending on foreign goods, but the formula shows the net export component improves as imports fall, boosting AD.

Option 2: False — 'a fall in imports results in a fall in aggregate demand.' This is incorrect for the same reason: with M falling and all else constant, NX = X - M rises, which increases AD via the net export component. The change in imports directly affects the NX portion, not through C, I, or G in this simple ceteris paribus setup. The error here stems from treating imports in isolation as a purely negative component of demand, ignoring the accounting identity that a lower import bill improves the net export balance and thus AD.

Summary perspective: Since AD moves with the net export term, a decrease in imports tends to raise aggregate demand when other factors stay the same. The statement in Option 1 incorrectly ties a fall in imports to a fall in AD, making it false in this framework.

Assuming other factors being constant, a fall in imports results in a fall in aggregate demand.

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