During the 1970s, U.S.prices generally rose faster than prices in other parts of the world.Which of the following changes would the Open Economy Effect predict took place in response to these price level changes?
A)Americans reduced the proportion of foreign goods bought since their foreign prices became relatively lower.
B)Americans reduced the amount of investment they undertook because interest rates increased.
C)Americans reduced the amount of goods and services they wanted to purchase for consumption because they felt less wealthy.
D)Americans reduced the fraction of purchases they made from domestic producers of goods and services since foreign prices became relatively lower.

Question

Quizplus · Accepted Answer

The Open Economy Effect predicts that a rise in prices in one country relative to other countries will lead to a shift in consumption towards relatively cheaper foreign goods. Therefore, in response to the relatively higher U.S. prices in the 1970s, Americans would have reduced the fraction of purchases they made from domestic producers of goods and services, choosing instead to buy relatively cheaper foreign goods. Option D describes this shift in consumption pattern.