If prices of the goods and services in the domestic market rise relative to those in foreign markets
A) households and firms will buy more foreign products and less domestic products, thereby decreasing net exports.
B) households and firms will buy more foreign products and less domestic products, thereby increasing net exports.
C) exports will rise and imports will fall, leading to an increase in net exports.
D) the exchange rate will rise, leading to an increase in exports.

Question

Quizplus · Accepted Answer

If prices of goods and services rise in the domestic market relative to foreign markets, it means that domestic products have become relatively more expensive compared to foreign products. Thus, households and firms will prefer to buy more foreign products which are relatively cheaper, and will reduce their purchases of domestic products. This will lead to a decrease in net exports as imports increase and exports decrease.

If Prices of the Goods and Services in the Domestic