The open economy effect refers to the fact that
A) the position and shape of the long run aggregate supply curve is partially due to the fact that we import goods.
B) the aggregate supply curve shifts when the economy grows.
C) the slope of the aggregate demand curve is partially explained by the reduction in the desire to buy fewer U.S. goods by U.S. residents and foreign residents as a result of a higher price level.
D) the immigration policies of the United States are disruptive to labor markets.

Question

Quizplus · Accepted Answer

The open economy effect suggests that a higher price level will lead to a reduction in demand for domestic goods, both by domestic and foreign residents. This is because higher prices make imports relatively more attractive, leading to less demand for domestically produced goods. This effect partially explains the downward slope of the aggregate demand curve.

The Open Economy Effect Refers to the Fact That