The change in the domestic price level that causes consumers to substitute into or out of relatively cheaper or relatively more expensive imported goods is called
A)the substitution-of-foreign-goods effect.
B)the wealth effect or real-balances effect.
C)the constant nominal income effect.
D)long-run equilibrium.

Question

Quizplus · Accepted Answer

This is known as the substitution-of-foreign-goods effect. When a change in the domestic price level makes imported goods relatively cheaper, consumers tend to switch to those imports leading to an increase in their demand, and a decrease in the demand for domestic goods. Conversely, if the domestic price level becomes relatively more expensive, consumers tend to switch from imported goods to relatively cheaper domestic goods leading to a decrease in the demand for imports and an increase in the demand for domestic goods.

The Change in the Domestic Price Level That Causes Consumers