Question

If the price level increases in the United States relative to foreign countries, then American consumers will purchase more foreign goods and fewer U.S. goods. This statement describes-

A. the output effect.
B. the foreign purchases effect.
C. the real-balances effect.
D. the shift-of-spending effect.

Answer 1

The situation described, wherein American consumers buy more foreign goods and fewer U.S. goods due to an increase in the U.S. price level relative to other countries, is known as the foreign purchases effect.

Step-by-step explanation:

If the price level increases in the United States relative to foreign countries, it leads to a situation where American consumers will find foreign goods to be more attractive due to their lower relative costs. This move away from domestic products and towards foreign products is known as the foreign purchases effect. The foreign purchases effect is a part of international trade dynamics and affects the aggregate demand in the nation's economy. It essentially states that an increase in the domestic price level, without a concurrent rise in foreign price levels, will make domestic goods more expensive and foreign goods comparatively cheaper. This scenario encourages consumers to purchase more imports and fewer exports, thereby reducing net export expenditures and shifting spending away from domestic goods and towards foreign goods.

Answer: B. the foreign purchases effect.