Question

The foreign purchases effect suggests that an increase in the U.S. price level relative to other countries will-

A. increase the amount of U.S. real output purchased.
B. increase U.S. imports and decrease U.S. exports.
C. increase both U.S. imports and U.S. exports.
D. decrease both U.S. imports and U.S. exports.

Answer 1

If the U.S. price level increases relative to other countries, it will lead to an increase in U.S. imports and a decrease in U.S. exports.

Step-by-step explanation:

The foreign price effect states that if prices rise in the United States relative to other countries, goods in the US will be relatively more expensive compared to goods in other countries. As a result, U.S. exports will become more expensive, causing the quantity of exports to decrease. Conversely, U.S. imports from abroad will become relatively cheaper, leading to an increase in the quantity of imports. Therefore, an increase in the U.S. price level relative to other countries will B. increase U.S. imports and decrease U.S. exports.