The foreign purchases effect suggests that a decrease in the U. S. price level relative to other countries will Multiple Choice decrease U. S. exports and increase U. S. imports. shift the aggregate supply curve leftward. increase U. S. exports and decrease U. S. imports. shift the aggregate demand curve leftward.

Question

Owen

Business

2 March, 23:55

The foreign purchases effect suggests that a decrease in the U. S. price level relative to other countries will Multiple Choice decrease U. S. exports and increase U. S. imports. shift the aggregate supply curve leftward. increase U. S. exports and decrease U. S. imports. shift the aggregate demand curve leftward.

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Answers (1)

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Summer Palmer · Answer 1

The correct answer, in this case would be increase U. S. exports and decrease U. S. imports or second last option given in the answer choices.

Explanation:

Considering everything else constant, a decrease in the US price level relative to price level in other countries basically implies that US goods and service are now cheaper to the residents of the other countries. This would essentially lead to an increase in demand for US goods and services in the international market among the foreign residents. Hence, based on the purchase effect, a higher demand for US goods and services would lead to an increase in export of US goods and services to the rest of the world and a simultaneous decrease in import of foreign goods and services by US as the foreign goods and services have become relatively more expensive to US residents or citizens following a decrease in US price level relative to price level in other countries, as mentioned in the question.