Which of the following is an example of the foreign trade effect,assuming the U.S.price level decreases?
A) The purchasing power of money decreases and people buy fewer goods.
B) U.S.goods are less expensive for Americans so they buy fewer imports and more domestic goods.
C) U.S.production costs stay constant and profits for businesses increase.
D) The demand for loans decreases so interest rates decline and loan-financed purchases increase.

Question

Quizplus · Accepted Answer

The foreign trade effect refers to the impact of changes in a country's price level on its exports and imports. If the U.S. price level decreases, U.S. goods become relatively less expensive compared to foreign goods, leading to an increase in export demand and a decrease in import demand. Therefore, Americans would buy fewer imports and more domestic goods, which results in an increase in net exports.

Which of the Following Is an Example of the Foreign