The Foreign Purchases Effect on Aggregate Demand Suggests That a

question 18

Multiple Choice

The foreign purchases effect on aggregate demand suggests that a

• A) fall in our domestic price level will increase our imports and reduce our exports, thereby reducing the net exports component of aggregate demand.
• B) fall in our domestic price level will decrease our imports and increase our exports, thereby reducing the net exports component of aggregate demand.
• C) rise in our domestic price level will increase our imports and reduce our exports, thereby reducing the net exports component of aggregate demand.
• D) rise in our domestic price level will decrease our imports and increase our exports, thereby reducing the net exports component of aggregate demand.

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Definitions:

Autarky Price

The price of a good or service in a closed economy with no international trade, set by the balance of domestic supply and demand.

World Price

The international market price of a good or service, influenced by global supply and demand conditions.

Domestic Quantity

The total amount of a goods or services produced and consumed within a country's borders.

Trade

The exchange of goods, services, or both between parties, usually on the basis of comparative advantage.