Net Exports Offset Domestic Demand Decline

Steps:

• Identify GDP components: GDP = C + I + G + (X - M), where C is consumption (domestic demand).
• Note falling domestic demand reduces C, lowering GDP.
• Determine what could counteract this: An increase in exports (X) raises net exports, boosting overall GDP.
• Confirm exports lessen the impact by replacing lost domestic spending.

Why A is correct:

• In the GDP formula, rising exports (X) directly increase net exports (X - M), offsetting the drop in consumption (C) and stabilizing total output.

Why the others are wrong:

• B: Higher imports (M) worsen the GDP decline by increasing the trade deficit, subtracting more from net exports.
• C: Increased savings reduce current consumption (C), further contracting domestic demand and GDP.
• D: Higher taxes lower disposable income, reducing consumption (C) and amplifying the demand fall.

Final answer: A