📚 Learning Guide
Full Employment Equilibrium
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If Country Alpha experiences a recession in its trading partner, which of the following is the most likely cause of the subsequent decrease in Country Alpha's output?

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Choose the Best Answer

A

A decrease in demand for Country Alpha's exports

B

An increase in productivity within Country Alpha

C

A rise in domestic consumption due to lower prices

D

An influx of foreign investments increasing capital

Understanding the Answer

Let's break down why this is correct

Answer

When Country Alpha's trading partner goes into a recession, it means that the partner's economy is slowing down. This can lead to fewer goods and services being bought from Country Alpha because people in the trading partner are spending less money. As a result, Country Alpha may produce less because there is less demand for its exports. For example, if Country Alpha sells cars to its trading partner and the partner's economy slows, fewer cars will be purchased, causing Country Alpha to cut back on production. This decrease in production can lead to lower output and possibly affect jobs in Country Alpha as well.

Detailed Explanation

When a trading partner has a recession, they buy less from Country Alpha. Other options are incorrect because Some might think that better productivity means more output; It's easy to think that lower prices would make people buy more.

Key Concepts

Full Employment Equilibrium
Aggregate Demand and Supply
Monetary Policy
Topic

Full Employment Equilibrium

Difficulty

medium level question

Cognitive Level

understand

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