The International Substitution Effect Exists Because a

question 115

Multiple Choice

The international substitution effect exists because a

• A) higher price level will reduce interest rates and stimulate foreign investment.
• B) lower price level will make domestically produced goods less expensive relative to foreign goods.
• C) higher price level will reduce the purchasing power of money.
• D) lower price level will encourage Americans to import more foreign goods.

---

Definitions:

Expected Return

The average of all possible returns for an investment, weighted by the likelihood of each outcome, representing the mean of the probability distribution of returns.

APT

The Arbitrage Pricing Theory, an asset pricing model that predicts a security's returns using the linear relationship of its expected return with macroeconomic factors.

Developed

Refers to countries or regions with advanced economic systems, typically characterized by high gross domestic product (GDP) and well-developed infrastructure.

Arbitrage Opportunity

The chance to buy an asset at a low price in one market and simultaneously sell it at a higher price in another market to profit from the price difference.