In a two-commodity, two-country trading world (as in the offer curve diagrams), if, at a Given terms of trade (price of good X ÷ price of good Y), there is an excess demand for Good X, then there must __________ and the price of good X relative to the price of good Y will therefore __________.
A) also be an excess demand for good Y; rise
B) also be an excess demand for good Y; rise, fall, or not change - cannot be determined Without more information
C) be an excess supply of good Y; rise
D) be an excess supply of good Y; fall

Question

Quizplus · Accepted Answer

In a two-commodity, two-country trading world, if there's an excess demand for Good X, it implies that there's an excess supply of Good Y (since resources would shift to meet the demand for X, leading to less production of Y). Consequently, the price of Good X relative to Good Y will rise as X becomes scarcer relative to Y.

In a Two-Commodity, Two-Country Trading World (As in the Offer