Economics: AE function

Question

Until recently, the mountainous country of Tibet had been cut off from the rest of the world. An active international sector has been created. Tibet has pursued a policy of ensuring that exports equal imports. As a result of this policy, Tibet's AE function will

a. not shift

b. become flatter

c. become steeper

d. shift upward

why?

Would the answer be (a) not shift, since the exports would equal imports, thus making Xn= 0?

Therefore, AE = G Ip C Xn would just equal G Ip C.

I'm really confused, any help would be great.

Thank you

Answer 1

AE = C+I+G+NX

nx was initially =0 so AE=C+I+G

the curve of AE becomes flat or steep due to any change in the marginal propensity to consume or marginal rate of taxation or marginal propensity to import and export

so as there is no hint in the situation that the marginal propensities have changed hence b and c are out

now as tibet has recently been introduced to international community its curve should have shifted due to either imports or exports... but as the situation clarifies that tibet is making sure that import is equal to export hence as u said NX remains 0 (which was also 0 initially as it was cut off) and the AE curve does not shift answer is (a).