An open economy permits the exchange of goods and services with other countries. Consumers can purchase either domestically produced goods or imported goods, while producers can sell their products both domestically and internationally. This interaction takes place through the output (goods) market, making it the primary channel linking domestic and foreign economies. Although open economies are also connected through financial markets, the statement specifically refers to the choice between domestic and foreign goods, which directly concerns the output market. Therefore, Option C is the correct answer.

The national income identity for an open economy is: Y = C + I + G + NX, where NX = X − M. Statement 1 is incorrect because this identity is specifically used for an open economy, not a closed economy. Statement 2 is correct because domestic output equals spending by residents on domestic goods together with spending by foreigners on domestic exports. Statement 3 is incorrect because imports are not excluded. They are already incorporated within NX (Net Exports = Exports − Imports). Even though M is not written separately, its effect is fully included. Hence, Option D is correct.

The derivation follows a logical sequence: Step 4: Start with the open economy equilibrium condition: Y + M = C + I + G + X Step 1: Rearrange by subtracting imports from both sides: Y = C + I + G + X − M Step 2: Define Net Exports (NX) as: NX = X − M Step 3: Substitute this definition into the equation: Y = C + I + G + NX This sequence correctly derives the national income identity for an open economy. Therefore, Option A is correct.

Net exports are calculated as: NX = X − M 1. X = 150, M = 100: NX = 50 (>0), so it is a Trade Surplus (c). 2. X = 90, M = 120: NX = −30 (<0), so it is a Trade Deficit (a). 3. X = 200, M = 200: NX = 0, so it is Balanced Trade (b). 4. X grows faster than M: Net exports increase over time, making NX increasingly positive (d). Thus, the correct matching is 1-c, 2-a, 3-b, 4-d, which corresponds to Option B.

The import function is: M = M̄ + mY where: M̄ = Autonomous imports, which occur even when income is zero. mY = Imports that increase with national income. Assertion (A) is false because the equation clearly includes a fixed baseline (M̄) in addition to income-dependent imports. Reason (R) is true because autonomous imports are independent of income. Therefore, Option B is correct.

Given: M = 50 + 0.05Y National income: Y = 1000 Substituting, M = 50 + (0.05 × 1000) M = 50 + 50 = 100 Thus, the total value of imports is 100. Hence, Option C is correct.

Exports are goods and services produced domestically but purchased by foreigners. The primary determinant of export demand is foreign income (Yf). As the income of foreign consumers increases, they can afford to buy more goods, including imports from other countries. Consequently, exports from the domestic economy increase. Domestic taxes, domestic income, and the marginal propensity to save do not directly determine foreign demand for domestic goods. Therefore, Option D is correct.

The real exchange rate (R) measures the relative price of domestic goods in terms of foreign goods. Assuming prices remain constant, an increase in R makes domestic goods relatively cheaper compared to foreign goods. As a result: Foreign buyers demand more domestic goods, leading to higher exports. Domestic consumers find imported goods relatively more expensive, leading to lower imports. Therefore, Option A is correct.

The equilibrium equation is: Y = Ā + cY − mY 1. Ā → d. Total autonomous expenditures because autonomous expenditure does not depend on income. 2. cY → a. Total induced consumption based on income because consumption rises with income. 3. −mY → c. Leakage of domestic income into imports because imports reduce domestic aggregate demand. 4. (1 − c + m)Y = Ā → b. Final rearranged form to solve for Y after collecting income terms on one side. Hence, the correct matching is 1-d, 2-a, 3-c, 4-b, corresponding to Option A.

In the open economy equilibrium model, Ā = C̄ + Ī + Ḡ + X̄ − M̄ where: C̄ = Autonomous consumption Ī = Autonomous investment Ḡ = Autonomous government expenditure X̄ = Exogenous exports −M̄ = Autonomous imports (subtracted because imports are a leakage) Although Ḡ is also part of autonomous expenditure, it is not listed among the statements. All four listed components correctly belong to Ā, making Option B correct.

The correct sequence is: Step 2: Government increases Ḡ, creating an initial injection into the economy. Step 4: This immediately raises domestic income. Step 1: Higher income induces additional consumption, but part of it is spent on imported goods. Step 3: Since imports are a leakage, the increase in domestic output is smaller than it would be in a closed economy. Thus, the correct order is 2 → 4 → 1 → 3, making Option C correct.

When national income increases, part of the additional income is spent on imported goods. This expenditure leaves the domestic economy and does not generate further domestic income. Therefore, imports reduce the size of the multiplier by acting as an additional leakage from the circular flow of income. In contrast, injections such as investment, government expenditure, and exports increase aggregate demand. Hence, Option D is correct.

Using the formula: [ \text{Multiplier}=\frac{1}{1-c+m} ] 1. c = 0.8, m = 0.3 [ \frac{1}{1-0.8+0.3}=\frac{1}{0.5}=2.0 ] → a 2. c = 0.9, m = 0.1 [ \frac{1}{1-0.9+0.1}=\frac{1}{0.2}=5.0 ] → c 3. c = 0.75, m = 0.25 [ \frac{1}{1-0.75+0.25}=\frac{1}{0.5}=2.0 ] → d 4. c = 0.5, m = 0.5 [ \frac{1}{1-0.5+0.5}=\frac{1}{1}=1.0 ] → b Hence, the correct matching is 1-a, 2-c, 3-d, 4-b, which corresponds to Option D.

The multiplier in an open economy is: [ \frac{1}{1-c+m} ] whereas in a closed economy it is: [ \frac{1}{1-c} ] Since m > 0, the denominator in the open economy multiplier is larger than that of the closed economy. A larger denominator produces a smaller multiplier. Therefore, for the same increase in autonomous expenditure, equilibrium income rises by a smaller amount in an open economy. Thus: Assertion (A) is true. Reason (R) is also true and correctly explains the assertion. Hence, Option C is correct.

Given: c = 0.8 m = 0.2 ΔX̄ = 200 Open economy multiplier: [ \frac{1}{1-0.8+0.2}=\frac{1}{0.4}=2.5 ] Therefore, [ \Delta Y=2.5\times200=500 ] Hence, the increase in equilibrium income is 500, making Option B correct.

In an open economy, the equilibrium income multiplier for an autonomous change in imports is: [ \frac{\Delta Y}{\Delta \overline{M}}=-\frac{1}{1-c+m} ] The negative sign indicates that an increase in autonomous imports reduces aggregate demand, causing equilibrium income to fall. The denominator (1 − c + m) is the open economy multiplier denominator, where m represents the marginal propensity to import. Therefore, Option A correctly represents the multiplier effect of autonomous imports.

Aggregate Demand (AD) in an open economy is: [ AD = C + I + G + NX ] where NX = X − M. Statement 1 is correct because an increase in exports raises aggregate demand in the same way as an increase in government expenditure. Statement 2 is correct because higher imports reduce aggregate demand by diverting spending toward foreign goods. Statement 3 is incorrect because changes in net exports generate multiplier effects, influencing equilibrium income. Hence, Statements 1 and 2 are correct, making Option B the correct answer.

The sequence begins when consumers shift their spending away from imported goods. Step 4: Consumers switch some preference away from foreign goods. Step 2: This causes the autonomous import component (M̄) to decrease. Step 3: Lower imports increase demand for domestically produced goods. Step 1: The increase in domestic demand generates a multiplier effect, raising equilibrium income. Therefore, the correct order is 4 → 2 → 3 → 1, corresponding to Option A.

The passage explains that when autonomous expenditure increases, income also rises. A portion of this additional income is spent on imports when the marginal propensity to import (m) is positive. This creates an additional leakage from the domestic economy. If imports increase rapidly as income rises, maintaining exports greater than imports (trade surplus) becomes more difficult because the increase in imports reduces net exports (NX). Therefore, Option D correctly explains why a high marginal propensity to import can weaken a trade surplus.

The passage explains that an increase in autonomous expenditures raises national income. As income increases, consumption also increases. Since the marginal propensity to import is greater than zero, part of the additional consumption is directed toward foreign goods rather than domestically produced goods. This causes imports to rise, creating an additional leakage from the economy. If imports increase substantially relative to exports, the trade balance may deteriorate, potentially worsening a trade deficit. Therefore, Option A is the correct answer.