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

Question

Quizplus · Accepted Answer

The substitution effect implies that as the price level in Canada increases relative to other countries, consumers and businesses will find foreign goods and services more attractive price-wise, leading to an increase in imports. Simultaneously, Canadian goods and services become more expensive for foreign buyers, reducing exports.

The Substitution Effect Suggests That an Increase in the Canadian