A price level increase tends to reduce net exports, thereby reducing the amount of real goods and services purchased in the United States. Economists refer to this phenomenon as
A) the wealth effect.
B) the barrier effect.
C) the open-economy effect.
D) the Gross Domestic Product (GDP) effect.

Question

Quizplus · Accepted Answer

The phenomenon described in the question is known as the open-economy effect. A price level increase in the United States makes its exports more expensive relative to other countries, which reduces demand for US exports and increases demand for imports, leading to a reduction in net exports.

A Price Level Increase Tends to Reduce Net Exports, Thereby