Final answer:
False, a rise in absolute prices does not guarantee an increase in relative prices. Relative prices compare one good to another and may change independently of general price level increases, influenced by factors such as consumer substitution and international trade effects.
Step-by-step explanation:
Relative prices are the price of one good or service compared to another, whereas absolute prices refer to the price level of all goods and services. When the price of a specific good increases, consumers might seek substitutes, and as such, relative prices can shift in unpredictable ways. For instance, if the price of peaches were to increase by $100 per pound, consumers might switch to other fruits, leading to a change in the relative price of peaches compared to other fruits but not necessarily an increase in the average price level of all food. Moreover, a rise in absolute prices could be associated with inflation, where all prices rise, but this does not inherently affect the relative price between two different goods or services. The assessment of relative prices is crucial for understanding consumer behavior, as individuals make decisions based on the price of a good relative to others. Substitution bias must also be considered, which occurs when consumers alter their consumption in response to changes in relative prices, a factor that traditional inflation measures can sometimes overlook. Additionally, a nation's price level has implications for international trade. A higher domestic price level could make exports more expensive and imports cheaper, thereby affecting net exports. Conversely, a lower price level can have the opposite effect and stimulate exports. The response of net exports to changes in the domestic price level reveals the international trade effect, a component of the aggregate demand curve.