A shift away from expenditures on domestic goods and a shift toward expenditures on foreign goods when the domestic price level increases is known as
A) the real-balance effect.
B) the interest rate effect.
C) the open economy effect.
D) demand side inflation.

Question

Quizplus · Accepted Answer

This is known as the open economy effect, as it involves a shift in consumer spending towards foreign goods due to a rise in the domestic price level. This can occur when the exchange rate is fixed or when there is a high degree of trade openness. The real-balance effect refers to changes in consumer spending due to changes in the real value of their wealth, while the interest rate effect refers to changes in investment and borrowing due to changes in interest rates. Demand side inflation refers to inflation caused by excess demand in the economy.

A Shift Away from Expenditures on Domestic Goods and a Shift