Expenditure switching refers to
A)a switching back and forth between investment and consumption expenditures.
B)a switching back and forth between domestic and foreign goods in response to changes in the exchange rate.
C)a switching back and forth between domestic and foreign goods in response to changes in the interest rate.
D)a switching of back and forth in the current account from a deficit to a surplus and vice versa.

Question

Quizplus · Accepted Answer

Expenditure switching refers to the behavior of consumers and firms who switch their purchases from domestic to foreign goods (or vice versa) in response to changes in the exchange rate. When the domestic currency appreciates, foreign goods become relatively cheaper, and domestic consumers tend to switch their purchases to foreign goods, leading to a decrease in domestic demand and an increase in foreign demand. Similarly, when the domestic currency depreciates, domestic goods become relatively cheaper, and foreign consumers tend to switch their purchases to domestic goods, leading to an increase in domestic demand and a decrease in foreign demand.

Expenditure Switching Refers to