Why do our political leaders favor exports of U.S. goods and "buy American" policies?
What will be an ideal response?
In the open economy model exports are an added component of total demand, thus an increase in exports will shift the planned expenditures line up and increase equilibrium income by a multiple amount. The multiplier in this case is the MPC adjusted for the propensity to import. Thus imports affect the multiplier; if U.S. residents become more attracted to foreign goods the marginal propensity to import will increase, causing the multiplier to fall and reducing the slope of the planned expenditures line. This will cause output to decrease. Hence political leaders favor increased exports (because it increases GDP and reduces unemployment) and reduced imports (because to the extent that U.S. residents buy U.S. goods rather than imports, output will be higher).
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What will be an ideal response?
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