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Question:

Consider the following statements:
Statement 1: Net exports vary negatively with domestic income and with the domestic price level.
Statement 2: The government’s fiscal deficit varies negatively with domestic income.
Which of the following is most likely?

A Both statements are correct.
Explaination

• An increase in domestic income increase imports, reducing net exports.
• An increase in the domestic price level increases imports and decreases exports, reducing net exports.
• An increase in income increases tax revenue, reducing the budget deficit