Consider the following scenario. Inflation in Argentina pushes the price of Argentine wine up 25%. Inflation in the United States pushes the price of California wine up 10%. If the exchange rate remains constant, the U.S. demand for wine from Argentina
A) decreases.
B) increases.
C) remains constant.
D) California wine is better than Argentine wine, so there never is a U.S. demand for wine from Argentina.

Question

Quizplus · Accepted Answer

With the price of Argentine wine increasing by 25%, it becomes relatively more expensive than California wine, which has only increased by 10%. As a result, U.S. consumers are likely to shift their demand towards California wine and away from Argentine wine, reducing the demand for the latter.

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