A rise in the price of imports or a fall in the price of exports will
A) improve the terms of trade.
B) worsen the terms of trade.
C) expand the production possibilities frontier.
D) contract the production possibilities frontier.

Question

Quizplus · Accepted Answer

A rise in the price of imports or a fall in the price of exports will worsen the terms of trade, as a country will receive less value for the goods it exports compared to what it pays for the goods it imports. This will result in a lower quantity of imports that a country can receive for a given quantity of exports, which will shift the production possibilities frontier inward, reducing the range of goods and services that the country can produce.

A Rise in the Price of Imports or a Fall