The international substitution effect exists because a
A) higher price level will reduce interest rates and stimulate foreign investment.
B) lower price level will make domestically produced goods less expensive relative to foreign goods.
C) higher price level will reduce the purchasing power of money.
D) lower price level will encourage Americans to import more foreign goods.

Question

Quizplus · Accepted Answer

The international substitution effect refers to the tendency of consumers to switch from domestically produced goods to foreign-produced goods when the relative prices change. A lower price level, as stated in option B, means that domestically produced goods become less expensive compared to foreign goods, making it more attractive for consumers to switch to domestic goods, resulting in an increase in exports, and a decrease in imports.

The International Substitution Effect Exists Because a