AP Macroeconomics Question 1: Answer and Explanation
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1. An American buys an entertainment system that was manufactured in China. How does the U.S. national income accounts treat this transaction?
- A. Net exports and GDP both rise.
- B. Net exports and GDP both fall.
- C. Net exports and GDP go in opposite directions.
- D. Net exports fall, and there is no change in GDP.
- E. There is no change in net exports, and GDP falls.
Correct Answer: B
B GDP is the sum of consumption, investment, government spending, and net exports (in equation form: GDP = C + I + G + X). In this case, as the American is buying something made in China, net exports would fall, causing GDP to fall. The answer is (B).