The foreign purchases effect on aggregate demand suggests that a
A) fall in our domestic price level will increase our imports and reduce our exports, thereby reducing the net exports component of aggregate demand.
B) fall in our domestic price level will decrease our imports and increase our exports, thereby reducing the net exports component of aggregate demand.
C) rise in our domestic price level will increase our imports and reduce our exports, thereby reducing the net exports component of aggregate demand.
D) rise in our domestic price level will decrease our imports and increase our exports, thereby reducing the net exports component of aggregate demand.

Question

Quizplus · Accepted Answer

A rise in the domestic price level makes domestic goods more expensive relative to foreign goods, leading to an increase in imports (as consumers buy cheaper foreign goods) and a decrease in exports (as foreign consumers buy less of the more expensive domestic goods), thereby reducing the net exports component of aggregate demand.

The Foreign Purchases Effect on Aggregate Demand Suggests That a