Question : The foreign trade effect suggests that an increase in the price level:
Option 1: Increases imports and decreases exports
Option 2: Decreases imports and increases exports
Option 3: Increases both imports and exports
Option 4: Decreases both imports and exports
Correct Answer: Increases imports and decreases exports
Solution : The correct answer is (a) Increases imports and decreases exports.
The foreign trade effect suggests that an increase in the price level leads to an increase in imports and a decrease in exports. This effect occurs because a higher price level makes domestic goods and services relatively more expensive compared to foreign goods and services.
When the price level rises, domestic goods become relatively more costly for consumers both domestically and abroad. As a result, consumers in the domestic market are more likely to shift their demand towards cheaper imported goods and decrease their demand for domestic goods. This leads to an increase in imports.
On the other hand, the increase in the price level makes domestic goods relatively more expensive for foreign consumers. This reduces their demand for domestic goods and leads to a decrease in exports.
Question : When price of a foreign currency falls ______from that foreign country becomes cheaper and ________ increases.
Option 1: Imports, imports
Option 2: Exports, exports
Option 3: Imports, exports
Option 4: Exports, Imports
Question : What is the impact of a stronger domestic currency on a country's imports and exports?
Option 1: Increase in imports, decrease in exports
Option 2: Decrease in imports, increase in exports
Option 3: Increase in imports, increase in exports
Option 4: Decrease in imports, decrease in exports
Question : The wealth effect suggests that an increase in the price level leads to:
Option 1: A decrease in consumption expenditure
Option 2: An increase in consumption expenditure
Option 3: A decrease in investment expenditure
Option 4: An increase in investment expenditure
Question : The aggregate demand curve slopes downward due to the:
Option 1: Wealth effect, interest rate effect, and foreign trade effect
Option 2: Wealth effect and interest rate effect only
Option 3: Interest rate effect and foreign trade effect only
Option 4: Wealth effect and foreign trade effect only
Question : Which of the following best describes appreciation of currency:
Option 1: Imports become costlier
Option 2: Exports become cheaper
Option 3: Imports become cheaper
Option 4: No effect on Exports
Regular exam updates, QnA, Predictors, College Applications & E-books now on your Mobile