8:12 < .ıll 100 The IS Relation in the Open Econo... An increase in government spending leads to an increase in output and to a trade deficit. Demand, Z (a) 45° (b) Net exports, NX AG > O YTB Output, Y Output, Y 3 A' ZZ' B Trade deficit NX ZZ • Summary: - An increase in domestic demand leads to an increase in domestic output but leads also to a deterioration of the trade balance. An increase in foreign demand leads to an increase in domestic output and an improvement in the trade balance. Implications: - Shocks to demand in one country affect all other countries. Economic interactions complicate the task of policy makers. Policy coordination is not so easy to achieve. 1 Q 4 ...

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