In the Dornbusch-Fischer-Samuelson model of Question #24 above, a rise in labor productivity in the home country would cause real national income to __________ in the home country and __________ in the foreign country.
A) increase; to decrease
B) increase; also to increase
C) decrease; to increase
D) decrease; also to decrease

Question

Quizplus · Accepted Answer

In the Dornbusch-Fischer-Samuelson model, a rise in labor productivity in the home country leads to an increase in the relative price of the home country's non-traded goods, causing an increase in demand for its traded goods. This increase in demand for traded goods causes an increase in the home country's exports and thus an increase in real national income in the home country. Additionally, the rise in demand for traded goods causes an increase in the price of foreign currency and a decrease in the price of the home currency, causing an increase in real national income in the foreign country as well. Therefore, a rise in labor productivity in the home country would cause real national income to increase in both the home and foreign country.

In the Dornbusch-Fischer-Samuelson Model of Question #24 Above, a Rise