What happens in the domestic economy when there is an increase in foreign prices, all other things unchanged?
A) Net exports and aggregate demand fall.
B) Net exports fall and aggregate demand increases.
C) Net exports and aggregate demand increase.
D) Net exports rise and aggregate demand falls.

Question

Quizplus · Accepted Answer

When foreign prices increase, domestic goods become relatively cheaper, leading to an increase in net exports as foreign consumers buy more domestic goods. This increase in net exports boosts aggregate demand in the domestic economy.

What Happens in the Domestic Economy When There Is an Increase