During the 1970s,Canadian prices generally rose faster than prices in other parts of the world.What change would the open economy effect have predicted took place in response to these price level changes?
A)Canadians reduced the fraction of purchases they made from domestic producers of goods and services, since foreign prices became relatively lower.
B)Canadians reduced the amount of goods and services they wanted to purchase for consumption, because they felt less wealthy.
C)Canadians reduced the proportion of foreign goods bought, since their foreign prices became relatively lower.
D)Canadians reduced the amount of investment they undertook, because interest rates increased.

Question

Quizplus · Accepted Answer

The open economy effect predicts that as prices rise in a country, consumers will shift their purchasing towards relatively cheaper foreign goods. Therefore, choice A is the most likely response to the rising prices in Canada during the 1970s. This is because as Canadian prices rose faster than prices in other countries, foreign goods became relatively cheaper, incentivizing Canadians to switch their purchases to foreign sources.

During the 1970s,Canadian Prices Generally Rose Faster Than Prices in Other