Net Exports Affect AD and Trade Balance

Steps:

• Exports falling reduces net exports (X - M), a component of aggregate demand (AD = C + I + G + (X - M)).
• Imports rising increases M, further decreasing net exports and thus AD.
• Balance of payments on goods and services is the trade balance (X - M).
• Decreased X and increased M make X - M more negative, worsening the trade balance.

Why B is correct:

• Net exports decline (X falls, M rises), reducing AD per the Keynesian formula and worsening the trade balance by definition (trade balance = X - M).

Why the others are wrong:

• A: Trade balance worsens, not improves, as X - M decreases.
• C: AD falls due to lower net exports, not rises.
• D: AD falls due to lower net exports, not rises.

Final answer: B