Question

which one of the following statement is correct regarding the Keynesian model with the government sector and the foreign sector
(1) government expenditure is autonomous
(2) exports and imports are a function of the interest rate
(3) an increase in government expenditure will decrease the equilibrium level of income
(4) a decrease in net exports will increase the equilibrium level of income

Answer 1

Inflation and interest rates affect imports and exports primarily through their influence on the exchange rate. That's why it is correct, that exports and imports are a function of the interest rate.

So, the correct answer is (2).