Final answer:
Imposing a quota on imported cereal causes net exports to increase because it limits imports, leading to a rise in domestic production and consumption, but may result in higher prices and retaliation from trade partners.
Step-by-step explanation:
According to the LF-CE (Loanable Funds and Current Account Equilibrium) model, if a government sets a quota on imported cereal, net exports (NX) will increase. This is because a quota limits the quantity of cereal that can be imported into the country. If we assume that the demand for cereal remains constant, fewer imports mean that the domestic market must source more cereal from within the country, potentially increasing domestic production. Consequently, this should decrease the import component of net exports, resulting in a rise.
However, imposing a quota can have negative repercussions as well. It could lead to higher prices for consumers due to reduced supply and increased demand for domestic cereal. Furthermore, while domestic producers may benefit from increased prices and demand in the short term, imposing quotas often leads to retaliation from trading partners and may reduce the overall efficiency of the market, ultimately reducing world living standards.