The foreign purchases effect suggests that an increase in the U.S. price level relative to other countries will
A) increase the amount of U.S. real output purchased.
B) increase U.S. imports and decrease U.S. exports.
C) increase both U.S. imports and U.S. exports.
D) decrease both U.S. imports and U.S. exports.

Question

Quizplus · Accepted Answer

According to the foreign purchases effect, an increase in the U.S. price level relative to other countries will make U.S. goods relatively more expensive, causing a decrease in exports and an increase in imports. Therefore, the correct choice is B, which states that an increase in the U.S. price level will increase imports and decrease exports.

The Foreign Purchases Effect Suggests That an Increase in the U.S