The foreign purchases effect suggests that a decrease in the U.S. price level relative to other countries will
A) shift the aggregate demand curve leftward.
B) shift the aggregate supply curve leftward.
C) decrease U.S. exports and increase U.S. imports.
D) increase U.S. exports and decrease U.S. imports.

Question

Quizplus · Accepted Answer

The foreign purchases effect refers to the impact of changes in relative prices on international trade. A decrease in the U.S. price level relative to other countries means that U.S. goods become relatively cheaper, making them more attractive to foreign buyers, and imports become relatively more expensive, making them less attractive to U.S. buyers. Therefore, this will increase U.S. exports and decrease U.S. imports, leading to an increase in net exports and a rightward shift in the aggregate demand curve.

The Foreign Purchases Effect Suggests That a Decrease in the U.S