If the price level increases in Canada relative to foreign countries, then Canadian consumers will purchase more foreign goods and fewer Canadian goods.This statement describes:
A)the output effect.
B)the foreign trade effect.
C)the real-balances effect.
D)the shift-of-spending effect.

Question

Quizplus · Accepted Answer

This statement describes the foreign trade effect, which refers to the impact of a change in the price level on the net exports of an economy. When the domestic price level increases relative to foreign countries, the foreign goods become relatively cheaper, and domestic goods become more expensive, leading to an increase in imports and a decrease in exports. Therefore, Canadian consumers will purchase more foreign goods and fewer Canadian goods, which is the foreign trade effect.

If the Price Level Increases in Canada Relative to Foreign